18. The SWF’s investment policy should be clear and consistent with its defined objectives, risk tolerance, and investment strategy, as set by the owner or the governing body(ies), and be based on sound portfolio management principles.
18.1. The investment policy should guide the SWF’s financial risk exposures and the possible use of leverage.
18.2. The investment policy should address the extent to which internal and/or external investment managers are used, the range of their activities and authority, and the process by which they are selected and their performance monitored.
18.3. A description of the investment policy of the SWF should be publicly disclosed.
With a long tradition of prudent investing, ADIA's investment decisions are based solely on its economic objectives of delivering sustained long-term financial returns.
ADIA uses both active and passive/indexed strategies as part of the asset management process. ADIA's assets are managed by internal and external investment managers, who are subject to ADIA's risk and investment guidelines. ADIA regularly reviews the on- going performance of its internal and external managers. Each of the internal and external managers has been selected by ADIA for their experience and track record.
The Strategy Unit plays a central role in the investment process, with responsibility for developing, maintaining and periodically reviewing ADIA’s policy portfolio mix of more than two dozen asset classes and sub-categories. It also identifies medium-term tactical opportunities for generating returns in excess of those achieved by the long-term policy portfolio while maintaining ADIA’s target risk profile.
In accordance with ADIA’s prudent governance structure, the Strategy Unit’s recommendations are evaluated by the Strategy Committee, before being submitted to the Investment Committee and ultimately the Managing Director. Once approved, funds are allocated to the respective investment departments, which are responsible for implementation in line with their mandates, benchmarks and guidelines.
To achieve its long-term objectives, ADIA must be able to execute on its desired asset allocation in a timely fashion, in size, while minimising transaction costs. It is for this reason that slightly more than half of ADIA’s portfolio consists of index-replicating, or passive, strategies within quoted markets. This is offset by skilfully designed, actively managed investments across asset classes, in areas with the genuine potential to generate market outperformance, or alpha, over the long term.
ADIA’s guidelines, which help ensure that investment department’s portfolios are diversified, include limits on the size of the investment, the geographical and sector concentrations and what other types of exposures can be taken.
Evaluation & Follow-Up Division advises and supports the Managing Director, the Investment Committee and other committees that support ADIA’s governance framework.
The Division provides independent analyses and recommendations on all investment and asset allocation proposals generated by ADIA’s investment departments and Strategy Unit prior to their presentation to the Investment Committee. It also evaluates and prepares periodic reports on investment departments’ performance, strategies, risk profile, structure and resources, and on ADIA’s overall investment performance including the impact of its asset allocation decisions.
Evaluation & Follow-Up’s role also involves reviewing and providing recommendations on ADIA-wide strategic, organisational and governance matters.
The Global Research Unit provides the Managing Director and the leadership of ADIA with insights on global economic issues to aid discussion and decision-making across ADIA.
ADIA has a disciplined investment process that aims to generate stable returns over the long term within established risk parameters.
Risk management is embedded in all of ADIA’s investment and related activities, from asset allocation to investments in individual asset classes and ultimately to trade execution.
The Investment Services Department, working closely with investment teams, is responsible for protecting ADIA’s assets and adding value to the investment process through its core risk management responsibilities. These entail leading the disciplined execution of the risk management framework, advising on and monitoring adherence to risk appetite, supporting the RMC with an independent assessment of ADIA’s concentrations, and promoting a culture of risk awareness.
The Investment Services Department’s risk analysis includes:
- Continuously assessing all sources of risk on both an absolute and a relative basis, including through proprietary portfolio modelling;
- Developing a comprehensive risk assessment across all risk types, including “top-down” aggregate portfolio risk, “bottom-up” investment risk by asset class, credit and counterparty risk, operational risk, operational due diligence, business continuity, and compliance risk; and
- Identifying, monitoring, and escalating risk mitigation strategies to address emerging and ongoing risk issues on a timely basis.
In addition, and to ensure connectivity with Investment Services, each investment department has its own departmental-level risk framework.
By cascading down from the ADIA-wide framework, these combine a unity of purpose with the necessary flexibility to capture risks that are unique or specific to each asset class. The Virtual Risk team – a network of risk managers within investment departments and other key functions – is an integral part of the link between the ADIA-wide and the departmental risk management frameworks.
In total, around 60% of ADIA’s assets are managed externally in areas including equities, fixed income, money markets, alternative investment, real estate and infrastructure, and private equities. We engage managers across the risk spectrum, from index-replicating to actively managed mandates, and typically tailor each fund to our specific needs and internal guidelines.
ADIA’s alpha-seeking managers operate in a wide variety of geographies and asset classes and employ a comprehensive array of strategies to meet their objectives. Our goal is to ensure that we employ only those managers in whom we have the highest level of conviction operating across structurally attractive geographies and asset classes, who combine to produce the levels of alpha we demand from active management.
ADIA uses external managers to complement its internal capabilities in the management of our index-replicating – or “beta” – investments across the various asset classes and geographies.
In recognition of the important role they play, we devote time and effort to the process of recruiting and monitoring external managers. Our due diligence teams begin by creating a long list of potential managers in any given asset class and strategy, sourced from extensive internal databases. We then analyse these managers on the basis of ADIA’s “Four Ps Framework”.
This process involves discussions and face-to-face meetings with managers before we create a short-list, allowing us to build a well-rounded understanding of their backgrounds and potential to deliver sustainable outperformance against their mandates.
The teams then gather and analyse relevant data to back up their qualitative views on the attributes of each manager. In this way, we set clear expectations of the behaviours of each external manager and are able to put their performance in context against differing market conditions.
ADIA has developed robust systems and processes over many years that require our external managers to remain compliant with their agreed investment and operating parameters. Once appointed, teams in each department continuously monitor our managers, analysing portfolio performance, positions, risk exposures and investment styles, and hold regular follow-up meetings with them, both on-site and in their offices. These teams are supported by the Internal Audit Department, Evaluation & Follow-Up Division, Operations Department, Investment Services Department and Accounts Department, in coordination with ADIA’s custodian banks.
The use of external managers also ensures that ADIA retains up-to-date knowledge and is kept abreast of developments across the investment industry. While we have a clear focus on investment performance, our preference is to have long-term relationships with our external managers.
In addition to the detailed description provided above, the following charts illustrate ADIA’s diversified global investment portfolio across more than two dozen asset classes and sub-categories. We invest directly in global financial markets, alongside trusted partners and through a network of carefully selected external managers.