Abu Dhabi Investment Authority Sees Success in Fixed Income Single Pool Framework

Posted on 09/08/2021

The Abu Dhabi Investment Authority (ADIA) is a major fixed income investor given its size and reach. ADIA is invested in a wide range of fixed income products including emerging market bonds. At the start of 2019, ADIA’s Fixed Income & Treasury Department introduced its Single Pool Framework. This pool combined previously separate portfolios into one department-wide pool in a bid to reduce complexity, make investment decisions faster, and increase efficiency. ADIA wanted to get fuller picture of its bond risk under a single active risk budget. ADIA implemented the fixed income pool framework just in time when the COVID-19 pandemic hit and central banks printed money, formed more swap agreements, and increased central bank bond purchases to keep economies afloat. The devastating consequence of QE is that the balance sheets of the G-4 central banks – the U.S. Federal Reserve, the European Central Bank, Bank of Japan, and Bank of England, mushroomed by more than US$ 8 trillion during 2020 – money out of air one can say.

ADIA’s fixed income unit is now looking at different types of data and forecasts to gain an edge in bond investing. ADIA is looking at the extent of COVID vaccine distribution and its effectiveness in containing variants, while watching the market reaction to any tapering of quantitative easing programs. Taper talks or a slowdown of Federal Reserve’s bond purchasing, could make ADIA pull back in investing in collateralized loan obligations (CLO) and leveraged loans and seek out more liquid fixed income products. For some of the large SWFs, CLOs offered an attractive carry relative to other fixed income spread areas such as BBB-rated investment grade corporate credit. For the time being, sovereign funds have analyzed the actions of the Federal Reserve and with the Federal Reserve’s “broad based and inclusive” maximum employment objective, levered products for large sovereign investors will likely persist, according to SWFI research.

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