Abu Dhabi Investment Authority (ADIA), the cash-rich emirate's sovereign wealth fund, expects emerging market stocks to outperform in the long-term and said it took a "selective" approach in deploying money at its fixed income unit in 2011.
ADIA, whose assets range from Citigroup bonds to a stake in Britain's Gatwick airport, said high volatility in emerging market stocks had more to do with increased risk aversion among investors than fundamental concerns.
"Looking forward, it is likely that such volatility will decline over time as investors gain confidence in the ability of emerging markets to manage the various challenges they face and begin to focus more on economic fundamentals," the fund said in its 2011 review.
The sovereign wealth fund, among the world's largest, expects central banks in large emerging economies such as China and India to use monetary policy to thwart inflationary pressures, a factor it thinks will improve market valuations.
ADIA does not disclose its assets but analysts estimate it has $400-$800 billion under management.
MSCI's emerging equities index, the market benchmark, has been relatively flat in 2012 after falling 20.4 percent last year on concerns global growth would slow, mainly due to the debt crisis in Europe.
ADIA said its fixed income department had operated in a challenging environment in 2011, and had readjusted its portfolio positioning to counter the sell-off in developed markets. It did not disclose whether it had reduced its European exposure as the debt crisis in the region rumbled on.
"It (the fixed income department) took a selective approach in deploying capital by giving careful consideration to the increased level of risks in government bond markets," ADIA said.
Other sovereign wealth funds have been reviewing their European holdings in light of the crisis, now in its third year.
China's $410 billion fund China Investment Corp has cut its stock and bond investments in Europe because it sees rising risks of a euro zone breakup, the fund's chairman was quoted as saying in an interview published earlier in June.
ADIA has been beefing up its private equity department and hired Christophe Florin to head its emerging markets private equity team in May.
REJIG
In 2011, ADIA restructured its external equities department, separating indexed funds from active funds as part of a more focused strategy.
It merged what had been four departments into one for the active funds, while a new indexed funds department is also being set up. An internal restructuring was undertaken last July.
ADIA returned 6.9 percent on an annualised basis over a 20-year period, as of Dec. 31, 2011, a slight drop from the 7.6 percent it posted in 2010. On the same basis, the fund returned 8.1 percent over a 30-year period, similar to 2010.
Overall portfolio composition remained relatively unchanged from the previous year, with developed market equities attracting a maximum allocation of 45 percent.
Emerging market equities made up 10-20 percent of the total portfolio, while government bonds accounted for at least 10 percent with a maximum allocation of 20 percent.
North America and Europe accounted for the biggest chunk of investments, with about 60 to 85 percent going to the regions. Emerging markets constituted at least 15 percent.
ADIA provided a rare glimpse into its investment portfolio with its first annual review published in 2010. The same year, ADIA named Sheikh Hamed Bin Zayed Al-Nahayan, the brother of the UAE's ruler, as managing director after the death of previous head Sheikh Ahmed in a glider crash in Morocco.
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