Abu Dhabi fund's chief needs to strike a balance.

The new head of the world’s biggest sovereign wealth fund, whose appointment is expected imminently, will need to find a balance
between delivering consistent returns and conservative values, say industry observers.
The top role at Abu Dhabi Investment Authority (ADIA), has been vacant since Sheikh Ahmed bin Zayed al-Nahayan, a younger brother of the ruler of Abu Dhabi, who is also the President of the United Arab Emirates, died in a glider plane crash last month.
In its first annual review, the fund with assets of $500-700 billion, provided a rare glimpse into its portfolio, with an allocation of up to 85% in developed markets.
Although ADIA funnelled funds from the emirate’s oil exports into overseas stocks and bonds under Sheikh Ahmed, the new chief will soon find that heavy exposure to developed markets may not yield the kind of returns the fund has enjoyed over the years and will need to look at emerging markets for growth.
The fund returned 6.5% on an annualised basis over a 20-year period.
“Bearing in mind the macro prospects for the couple of years ahead and the low-developed countries’ growth versus higher emerging countries’ growth, one challenge for ADIA will be to diversify the portfolio to capture growth opportunities from emerging markets,” said Dorothee Gasser, Middle East and Africa senior economist at ING wholesale banking in London.
In the 2009 review, ADIA said it began to “cautiously” lift exposure to growth markets as opportunities in developed markets slowed but analysts say the firm may find it difficult to balance the shift, given their more conservative nature.
“In spite of its sophistication, ADIA is still a government-owned entity and... thus has still to keep a certain amount of conservatism in strategies,” said Gasser.
Sheikh Ahmed, ranked No. 27 on the Forbes list of the world’s most powerful people last year, also moved the firm’s investment strategy from that of an active fund to more of a passive one, focusing more on index-tracking funds.
Analysts say the fund may look at reducing exposure to relatively risky and underperforming assets like real estate where prices have fallen drastically in the last couple of years to focus more on growth areas like infrastructure.
The fund’s portfolio showed an allocation of up to 45% in developed equity markets while emerging market equities accounted for up to 20%. Real estate was given a maximum allocation of 10% while infrastructure were allotted a maximum of up to 5%.
The sovereign fund’s new chief will also continue to face pressure to increase its public transparency.
Though ADIA took a major step forward with the release of its first annual review, it still does not provide certain details like its total asset size, individual holdings, etc.
“The report (annual review) is a clear proof of the significant changes the fund has gone through over the years and its highly unlikely that we will now go back to the old days of no transparency,” said Efraim Chalamish, an SWF expert and global fellow at New York University Law School.
Chalamish said the push towards transparency was mainly driven by ADIA being part of the International Working Group (IWG) governing sovereign funds and was unlikely to change.
A succession plan for the sovereign fund has been set and will be announced within days, a source close to the government said on Tuesday.
Sheikh Khalifa bin Zayed al-Nahayan, UAE’s President and ruler of Abu Dhabi, is most likely to appoint a member of the ruling family to run the fund, say analysts.
“ADIA is essentially a custodian of Abu Dhabi’s wealth, which belongs to the ruling family, so one can infer from that,” said Khuram Maqsood, managing director at Emirates Capital in Dubai.