The World's Biggest Investor Is Bullish on U.S. Finance Stocks
By Graham Summers
Tuesday's biggest headline read something like this:
Abu Dhabi Investment Authority Buys 5% of Citigroup.
In layman's terms, a group of Middle Easterners bailed out one of the largest financial institutions the West has ever produced.
This isn't the first time we've discussed the trend of Middle Eastern sovereign wealth funds investing in finance firms. The Abu Dhabi Investment Authority (ADIA) is the largest, most powerful, and most secretive of the funds out there.
If you've never heard of ADIA before, it's no surprise. Despite managing anywhere from $600 billion to $1 trillion (the fund is so secretive no one is sure how much it controls), ADIA has operated below most investors' radar.
The fund was started by Sheikh Zayed bin Sultan Al Nahyan – founder of the United Arab Emirates – to invest Abu Dhabi's cash hoard. Abu Dhabi sits atop 10% of the world's oil reserves. With a population of only 1.8 million, it's the richest city in the world. The average net worth of an Abu Dhabi citizen is $14 million.
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ADIA has never published a track record, though it's believed to have averaged 10% since inception in 1976. A Frenchman named Jean-Paul Villain manages ADIA's assets. (Actually, "managed" isn't really quite the right word: Villain more or less directs ADIA's investment strategy; external managers control 70%-80% of the funds assets.)
The fund's public 5% purchase of Citigroup – which made ADIA the bank's largest shareholder – is a sign that billions upon billions more could be used to buy up U.S. financial firms. Typically, the fund will buy only 4.5% of a company... just below the 5% that requires public disclosure, so its position remains a secret.
To make a fortune in investing, you have to be willing to buy what no one else wants to. Financial stocks are currently at bargain-basement prices thanks to concerns surrounding subprime mortgage exposure and a worldwide tightening of lending standards.
While most investors are dumping these stocks, long-term value investors have been backing up the truck.
Over the last six months, financial gurus like Eddie Lampert and Warren Buffett have bought billions of dollars worth of finance stocks. Corporate insiders at finance companies have been binging too, making finance one of the most popular sectors for insider bulls since August. However, ADIA's recent position in Citigroup is the largest investment I've heard of so far.
Like Warren Buffett and other value investors, ADIA likes to buy for the long-term: The fund typically likes to hold a position for 15-20 years. So its position in Citigroup doesn't necessarily mean that Citigroup shares will erupt in the next quarter... or even next year, for that matter. It does, however, indicate that at current levels, Citigroup may be a bargain.
If you're looking for a long-term holding to sit on for the next decade, companies like Citigroup or Buffett's favorite banks (Bank of America and Wells Fargo come to mind) are some of the best opportunities out there.
You'll be investing your money alongside the greatest, most powerful investors in the world. But you've got to be willing to stomach some bumps along the way.
Good trading,
Graham
