Letter from
Hamed bin Zayed Al Nahyan
Historians will look back at 2021 as a year in which the global economy and equity markets delivered a broad-based recovery after the pandemic-driven lows of the previous year. A closer inspection, however, reveals a more complex picture, involving structural and societal shifts that will likely play out for years to come.
Throughout 2021, major central banks maintained highly accommodative monetary policies, keeping interest rates near zero and injecting liquidity into markets through quantitative easing. In parallel, the U.S. and other leading economies approved vast fiscal stimulus packages to soften the impact of intermittent lockdowns.
This economic largesse served to crowd out issues that may have derailed markets in past years. These included new variants of the COVID-19 virus, supply chain disruptions and accelerating inflation, as well as a U.S. election.
The MSCI World Equity Index ended the year 19% higher led by buoyant US equities progressing 26%. Other asset classes also delivered strong returns, including private equity, infrastructure, segments of real estate and alternative investments.
The year’s gains were neither steady nor evenly spread, reinforcing the importance of diversification, judicious asset allocation, and agility in capturing opportunities for outperformance.
Inflation was a key theme for policymakers and investors throughout 2021, as they sought to anticipate if, and to what extent, it would accelerate and hinder economic growth. Their early predictions proved to be conservative, as supply shortages met head-on with pent-up consumer demand and prices rose across the board. Meanwhile, labour market shortages led to higher wages, which added further impetus to the trend.
By year-end, the U.S. Consumer Price Index (CPI) had risen at the fastest rate on an annual basis since the early 1980s, forcing central banks to begin tightening monetary conditions earlier than previously anticipated.
Overall, ADIA was well positioned to benefit from market conditions in 2021, delivering strong returns both in absolute and relative terms while remaining aligned with its approved risk and liquidity profile.
“Overall, ADIA was well positioned to benefit
from market conditions in 2021, delivering strong
returns both in absolute and relative terms.”
Within its highly diversified mandate, ADIA sought out opportunities in regions and sub-regions with high potential over the long term and continued to build out its direct exposure to private markets. It also benefitted from positioning equity portfolios to capitalise on emerging trends, including opportunities arising from differing government responses to the pandemic.
Behind the scenes, meanwhile, ADIA continued to focus on simplifying governance structures and increasing internal agility, resulting in changes to both internal processes and departmental structure. These steps have centralised numerous middle and back office activities to unlock efficiency gains while increasing visibility of liquidity requirements and cash management activities. Ultimately, this has enhanced ADIA’s ability to consider investment strategy and risk appetite at the total portfolio level.
A number of allocation ranges in ADIA’s long term strategy portfolio were updated in 2021. These decisions align with changes to regional weightings in global indices on a geographic basis, and reflect the growth in private markets over recent years from an asset class perspective.
As at 31 December 2021, ADIA’s 20-year and 30- year annualised rates of return, on a point-to-point basis, were 7.3% and 7.3% respectively*, compared to 6.0% and 7.2% in 2020. These increases can be attributed to a combination of both the years falling out of the calculations as well as performance in 2021, underlining our preference for focusing on long term trends.
In 2022, the post-pandemic recovery is likely to face multiple challenges. At the time of writing, it is too early to assess the long term global economic consequences of the crisis in Ukraine. In the immediate term, growth forecasts are being lowered and inflation has increased, with associated issues rippling through markets around the world. How long-lasting and formative these effects prove to be, remains to be seen.
The unprecedented era of low interest rates that began after the financial crisis of 2008-2009, as well as the fiscal stimulus aimed at countering the worst effects of the pandemic, were already in the process of being unwound. In this postpandemic environment, investors are being asked once again to differentiate between regions and countries, as policy responses and cyclical factors diverge and result in a broader range of outcomes.
“The global pandemic has had a
significant impact on the way that people
live and work, and this is likely to have a
flow-on effect for many industries.”
Inflation is likely to remain a key area of concern. After decades of remarkably low and stable prices, the global economy now appears to be transitioning to a period of higher inflation which will dampen returns across asset classes, due to higher discount rates and lower real returns.
The pace of change in financial markets continues to accelerate. The global pandemic has had a significant impact on the way that people live and work, and this is likely to have a flow-on effect for many industries. Longer term, there are a number of other important themes that will profoundly reshape the investing landscape over time.
These include the rise of data-driven investing, which is providing new ways of identifying opportunities for outperformance, while also reducing the time available to capitalise on them. As a long-term investor, ADIA has always sought to remain at the vanguard of important developments in the business of investing, and this is no different.
In recent years, we have built our internal skill-sets in areas such as quantitative and data-driven investing, while instilling a more systematic, science-based approach throughout the organisation. To complement our fundamental investing talent, we have a specific focus on attracting new, specialist skill sets to ADIA, targeting STEM (science, technology, engineering and mathematics) backgrounds and those with strong research and development experience from across industries. Our objective is to foster a technology-enabled and scientific mindset, enabling us to identify, test and capture opportunities irrespective of market conditions. As part of this ongoing process, ADIA plans to roll out multiple in-house quantitative strategies in 2022 and will continue to grow its data analytics capabilities across the organisation.
In addition to the challenges of harnessing rapid technological advances – and the changing skillsets that investors will need to succeed – climate change remains an important theme with long-term and far-reaching consequences for the investment community.
ADIA integrated climate change considerations into its investment process in 2018 and continues to assess climate related risks within asset classes while seeking opportunities associated with the energy transition. ADIA also plays an active role as a founding member of the One Planet SWF Working Group, which seeks to accelerate the integration of climate change into institutional investment management processes.
Finally, in a world facing increasingly complex problems, we believe that it is important for policymakers, corporate leaders and investors to seek out opportunities for targeted collaboration in areas of mutual interest.
In one such example, ADIA recently concluded its three-year tenure as Chair of the International Forum of Sovereign Wealth Funds (IFSWF). During this time, the IFSWF expanded its membership, continued to serve as a platform for funds to share experiences and best practices, and was active in promoting understanding of SWFs through research. In 2021, ADIA also supported the Government of Indonesia in developing its overall approach for the creation of the country’s newly-formed SWF, the Indonesia Investment Authority (INA).
While 2021 was another strong year for returns at ADIA, it will also be remembered for the growing momentum behind the implementation of ADIA’s vision for the future. We are enthusiastic about the opportunities that lie ahead, and in ADIA’s ability both to identify and capture them. Doing so will ensure that ADIA is well positioned to continue, as it has for more than 45 years, in fulfilling its mission to sustain the prosperity of Abu Dhabi.
* Performance is measured based on underlying audited financial data and calculated on a time-weighted basis. Performance for 2021 remains provisional until final data for non-listed assets is included.
