INTRO: Dubai is often viewed as one of the bougiest
areas in the world. From the Burj Khalifa and the Burj Al Arab to the Atlantis and the
dozens of lavish malls, it seems like Dubai is one the best places in the world to live.
Combine this with no income tax, and it’s not surprising why so many rich individuals
decide to retire in Dubai. With that being said though, Dubai often hogs the global spotlight
when it comes to the UAE, and people often overlook the emirate right next to Dubai,
Abu Dhabi. While Abu Dhabi isn’t talked about nearly as often, they’re just as well
off if not more well off, and one of their biggest flexes is their extremely wealthy
sovereign wealth fund. Abu Dhabi’s wealth fund currently manages $697 billion. This
isn’t quite the biggest in the world as there’s three other countries with even
larger funds. However, the thing note is that the countries with larger funds have significantly
larger populations as well. The most recent population numbers from Abu Dhabi indicate
that there’s 1.54 million residents in the city. If we divide $697 billion by 1.54 million
people, we get a whopping $452,597 per person, but it gets even better than that. You see,
while all residents of the city directly or indirectly benefit from the sovereign wealth
fund, the fund is primarily meant for Abu Dhabi citizens. And as we know, most of the
people in the UAE aren’t actually citizens. It’s estimated that only 11.48% of the UAE’s
population are nationals of the country while 88.52% are expats. This number is likely skewed
by Dubai, but even if we assume that 20% of Abu Dhabi’s residents are nationals, we
only get 308,000 people. And if we divide $697 billion by 308,000 people, we get a cool
$2.262 million per citizen. To put that in perspective, if we divide social securities’
$2.852 trillion in assets by the 291 million citizens in the country, we get um $9,774
per citizen. But before you try to move to Abu Dhabi, unless you’re from a neighboring
country, you won't be able to wriggle yourself anytime soon. The UAE has extremely strict
citizenship policies, and you’ll need to live in the UAE for at least 30 years to even
apply. So, while you and I probably can’t benefit from this, it's insane to see how
well off Abu Dhabi citizens really are. Just a hundred years ago though, Abu Dhabi was
a no name country that was filled with nomads who were just trying to fight for survival
on a daily basis. So, here’s how the average Abu Dhabi national went from being nomads
to being multi millionaires within just a few generations.
STRIKING LIQUID GOLD: Taking a look back, the story of Abu Dhabi
only dates back to 1761. Before 1761, there’s no records of human civilization in the town
specifically, which makes sense given that the area was just a desert which is extremely
difficult to inhabit without the help of modern technology. Nonetheless, a few tribesmen from
the Al Bu Falah clan decided to set up a small town in Abu Dhabi in 1761. Originally, the
area was called “Milh” which means salt in Arabic. One of the driving factors of the
early Abu Dhabi economy was pearl diving. The tribesmen would trade these pearls with
the Iranians and the Indians. This provided them with enough capital to sustain a small
civilization, but Abu Dhabi’s population never exceeded a few thousand people. In fact,
even at the start of 1900, Abu Dhabi only had a total of 6000 residents. Despite the
small population, Abu Dhabi would soon struggle to even support these residents. You see,
throughout the early 1900s, Japan’s pearling industry would take off which led to Abu Dhabi
losing most of their customers. To make things worse, the great depression would hit in 1929
which wiped out the few remaining customers Abu Dhabi had. In desperation, residents diverted
their focus onto camel herding and the production of dates and vegetables, but things were quite
rough. Most residents lived in huts built from palm leaves while wealthier residents
lived in mud brick homes. But, soon enough the country would get one glimpse of hope.
On March 3, 1938, Saudi Arabia would not only discover oil but one of the largest oil reserves
in the world. Abu Dhabi’s ruler at the time, Sheikh Shakbut would instantly authorize foreign
companies to come in and start looking for oil in 1939, but this turned out to be an
extremely long process. You see, World War 2 would really pick up steam in the first
half of the 1940s which put oil exploration on hold. Even after World War 2 though, the
search for oil was rather difficult due to the large sand dunes and sand storms all across
Abu Dhabi. Also, the oil companies were likely not that motivated to find oil in Abu Dhabi.
After all, Abu Dhabi was a rather small area and they had already found an ocean of oil
in Saudi Arabia. So, they had little need to find oil in Abu Dhabi. Nonetheless, they
kept looking, and the first sign of discovery would come in 1951. Light traces of oil and
gas would be discovered at the Murban No.1 well at a depth of 10,000 ft. Engineers would
enthusiastically continue drilling deeper, but at 12,500 ft they would make an unpleasant
discovery: sour gas. Sour gas is a natural gas that’s extremely poisonous and flammable.
One petroleum engineer would unfortunately be killed when sour gas burst out from the
pipes. For obvious reasons, drilling at this site was halted, but the search for oil was
not. And eventually, in 1958, Abu Dhabi would finally discover oil at the Umm Shaif field
nearly 20 years after the search had begun.
INDUSTRIALIZATION: While Abu Dhabi had struck oil, oil money
didn’t change the emirate all that much. You see, Sheikh Shakbut was extremely cautious
of spending the oil money because he didn’t know how long it would last. It took 19 years
to find a viable oil field, and if this field ran dry, it could take another 19 years or
even more to find another. So, while Sheikh Shakbut spent some of the money on concrete
buildings and paved roads, he saved the vast majority of it. But as years passed and Abu
Dhabi was able to negotiate better profit sharing agreements, much of the government
and the people felt that Sheikh Shakbut could be less frugal. These tensions eventually
blew over in 1966 when Sheikh Shakbut was basically forced to retire and replaced by
his brother Zayed. Unlike Sheikh Shakbut, Sheikh Zayed was extremely optimistic and
felt that the oil money could revolutionize Abu Dhabi forever. But, he decided to start
simple and establish the basic necessities of a city. He went ahead and started building
a road network that connected the center of the city with the various villages around
the city. He also built a seawall on the north side of the city which protected the city
from future damage from the ocean. He followed up these constructions with electricity, running
water, and a central sewage system. Once the necessities were covered, he shifted his focus
onto building modern government buildings, hotels, and housing projects. Around the same
time, Britain would also leave the Persian Gulf which allowed for the United Arab Emirates
to gain political independence. Soon after, Abu Dhabi would be made the provisional capital
of the UAE which made Sheikh Zayed the president of the entire country. Within just 10 years,
Abu Dhabi went from being a city of nomads to gaining independence and rapidly industrializing.
But Sheikh Zayed was careful to not let this progress get to his head. Sheikh Zayed was
also well aware that the oil money could stop at any point and that eventually the world
would move towards more sustainable forms of energy. So, he started investing excess
oil revenue as soon as possible. Initially, in 1967, he created the Financial Investments
Board which was responsible for investing the excess oil revenue. This was quite an
ambitious move for the time. You see, back then and even now, countries mainly invest
their money into gold and bonds. So, to create an investing body that would make investments
outside these categories was quite unique. This investment body didn’t last long though.
Sheikh Zayed soon realized that for such a system to truly be effective, it had to distanced
from the government as much as possible. So, in 1976, Sheikh Zayed founded a new organization
called the Abu Dhabi Investment Authority or the ADIA. As you would guess, he transferred
the responsibility of investing excess oil revenue over to them, and this marks the beginning
of Abu Dhabi’s sovereign wealth fund.
ADIA: Ever since the fund was founded, they have
slowly invested into basically everything you can think of. This includes equities,
fixed income, treasuries, real estate, private equity, and hedge funds. Abu Dhabi doesn’t
release a full on report of all of their holdings like Norway, but they do release a breakdown
of the categories in which they’re invested. Taking a look at the breakdown, we can see
that their biggest investment is in developed equities where they hold between 32 and 42%
of their money. They also hold a decent amount in emerging market equities and government
bonds. Their smallest category, however, is small cap equities where they only invest
1 to 5% of their money. As you can see, the ADIA’s holdings are pretty well diversified
and they avoid risky investments as much as possible, but they’re not prone to making
mistakes. Over the decades, they’ve made a handful of painful mistakes that have cost
them hundreds of millions and sometimes even billions. One of these mistakes was getting
involved in the Bank of Credit and Commerce International or the BCCI. In the 1980s, the
BCCI was the 7th largest private bank with over $20 billion in assets, so it likely seemed
like a pretty safe place to invest some money. But, the BCCI would eventually be linked with
a massive money laundering scheme and loads of other financial crimes which led to the
bank closing in 1991 and the ADIA losing hundreds of millions. Similarly, another major mistake
the ADIA made was investing heavily in 2007 and 8. The ADIA was literally buying the top
of the housing bubble, and one of their biggest investments was $7.5 billion into CitiGroup.
Once the housing bubble popped though, CitiGroup stock crashed 90% and it never recovered.
The ADIA suffered several similar losses during this time period. But, despite the downfall,
the ADIA continued to consistently invest and it’s worked out pretty well for them
overall. The last time the ADIA revealed annual returns was in 2010, and at the time, they
boasted an average annual return of 8.1% over the past 30 years. So, they basically just
match market returns, but it should be noted that the ADIA is likely far more diversified
than the S&P 500.
CASHING IN: At the end of the day, having hundreds of
billions in the bank is great and all, but the goal is to eventually cash in at a sustainable
pace. Abu Dhabi has avoided cashing in as much as possible because they have much bigger
ambitions for this fund. They don’t want the fund to just give their citizens a solid
retirement, but eventually make up for oil revenue as the world transitions to sustainable
energy. This is why one of the top goals of the fund is to move all of their assets to
sustainable investments. We don’t know exactly how much the ADIA has in sustainable investments,
but some sources suggest that the figure is around ⅔. So, Abu Dhabi still has some work
to do, but it looks like they’re headed in the right direction. With that being said,
it doesn’t like withdrawals will become a thing anytime soon. It seems like Abu Dhabi
really wants to get the fund to trillions of dollars first, but then again that’s
exactly what Norway has been doing as well. So, in the meantime, Abu Dhabi citizens’
multi millions is just paper wealth, but hey, it’s still way better than social security.
Do you guys think more countries should embrace a sovereign wealth fund? Comment that down
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