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Investment Review

Equities

After a shaky 12 months in 2018, equity markets soared in 2019, helped by better-than-expected corporate earnings and accommodative monetary policy, among other factors.

Investors began 2019 with expectations that the US Federal Reserve would continue to tighten monetary policy, but its decision to first hold and then begin to cut rates spurred market confidence as the year progressed.

Most markets recorded positive performance in 2019, with many indices reaching all time highs. Russia (MOEX), China (CSI300) and the US (S&P500) led the rally, while the few markets that lagged, such as Argentina (MERVAL), Chile (General) and Poland (WIG), were largely impacted by local issues.

Equity market volatility remained subdued for most of the year. Information technology stocks were among the leading gainers, posting their strongest rally in more than a decade. In developed markets, energy was the biggest laggard, and utilities and materials also underperformed, while among emerging equities the healthcare sector was the biggest underperformer. Equity investors maintained their preference for large cap companies with defensive characteristics, over value and smaller cap companies.

While most markets enjoyed strong gains, many of the factors that created challenges for active managers remained in place for much of the year.

In 2020, markets continue to be vulnerable to unexpected risks, as evidenced in the first quarter of the new year with the response to the outbreak of the Covid-19 coronavirus.

ADIA invests in equities through three departments: the Indexed Funds Department, which manages the largest proportion of ADIA’s equities with the objective of achieving index returns with the flexibility to add value within approved guidelines; the External Equities Department, which oversees the activities of external investment managers who employ active strategies to invest in equity markets across all major geographies; and the Internal Equities Department, which invests directly in global equity markets and actively manages these investments in order to generate returns that outperform the relevant benchmarks.

The Indexed Funds Department introduced innovative ‘Index Plus’ strategies in early 2019, which provide moderate returns in excess of the benchmark and within established risk parameters, and these performed well throughout the year. The Department also developed a new mandate, based on in-house analysis, which aims to integrate climate change considerations into portfolio construction while delivering returns with a low tracking error. A pilot for this climate change portfolio has been approved and implemented, and will be monitored throughout 2020.

In the External Equities Department (EED), judicious manager selection and a sharp focus on its target markets helped offset the impact of challenging market conditions for active managers. The Department’s strategy emphasises the targeting of less efficient markets and identifying quality managers who can produce high levels of excess returns within acceptable risk parameters. During 2020, the Department will continue to enhance its existing portfolio with a combination of active single country strategies as well as highly differentiated regional and global opportunities.

EED is planning to add Mexico to its group of single country mandates and has identified a reputable manager to lead its efforts in capturing local opportunities.

The Department will also fund a new strategy that targets modestly lower expected excess returns over time, with lower risk – an approach aimed at further enhancing EED’s ability to generate consistent long term dollar alpha for the total ADIA portfolio.

For the Internal Equities Department (IED), macro risks associated with the US-China trade war and slowing global growth created challenges, but with its long term outlook the Department was able to deliver positive results for the year, with a strong alpha contribution coming from emerging markets.

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