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Contrarian Wellcome Trust produces 18% return on investment

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The Wellcome Trust, the UK’s biggest charity, made a total return of 18% on its investment assets for the year to 30 September, thanks partly to counter-cyclical action in previous years, according to its annual report.

Returns were £2.6bn (€3.1bn) on a portfolio worth £14.5bn at the start of the year, with investment assets now worth £16.4bn.

The trust – whose main activity is funding medical research – said it had enjoyed positive returns from each major element of its portfolio – public equities, private equities, venture capital, hedge funds and property – over one, three, five and 10 years.

All those asset classes recorded gains of between 15% and 20% over the past year.

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In his report, Sir William Castell, chairman at the Wellcome Trust, said: “Danny Truell [the trust’s CIO] and his investment team continue to evolve our portfolio to ensure we have greater control of our destiny and that our long-term returns are driven more by the evolution of businesses than by short-term market fluctuations.”

For example, over the past year, the trust – which does not invest in companies deriving a material turnover or profit from tobacco-related products –

neither sold shares nor added any new holdings to its directly managed Mega Cap Basket of 31 holdings in large companies, valued at £3.4bn.

Set up in late 2008, the basket has returned 55% on cost, the best performer being its £255m block of Marks & Spencer shares, which has returned 134%.

A significant post-balance sheet development was the Twitter IPO, which resulted in a profit of $100m, from a stake of more than 1% in the company.

A further $100m profit came from the sale of Wellcome’s stake in drug company Amplimmune to AstraZeneca.

The report said market timing was an important tool for the fund.

“Having significantly increased our exposure to public and private equity holdings in the period between 2008 and 2011, when many investors had become risk-averse, we have reaped the rewards in the last two years as they have again embraced risk assets,” it said.

Equities in total account for 74.5% of the trust’s portfolio.

The report added that, over the past decade, the trust had consistently managed to secure better returns than equity markets – 10% per annum versus 9% for global equities – while recording much lower levels of volatility.

However, the largest contribution to equity performance came from the outperformance of strategies against their benchmarks.

The report said: “The £612m internally managed Optionality Basket – which consists of companies whose operating performance and valuation appear to offer considerable upside potential given the underlying strength of their franchises – led the way, returning 47% and beating markets by 29%.”

Turning to fixed income, the trust said: “Not owning bonds or commodities, which generally delivered negative or lacklustre returns, removed a potential drag on performance. Both nominal and real bond yields remain, in our opinion, too low as a consequence of financial repression, and we are unlikely to change our stance on bonds.”

But it said investment opportunities might be more interesting in commodities.

The real estate portfolio – 10.2% of assets – is made up 90% of residential property, which recorded another strong year.

As for the immediate future, Wellcome expects asset returns to be weaker over the next five years – say in the high single digits – than they have been over the last five or 10 years.

“Companies will continue to struggle to grow revenues, given the negative impact on the productivity of both labour and capital from continuing zero interest rate policies, which divert capital away from productive investment,” said the report, which also said equities now appear fairly valued.

The report concluded: “Our response has been to concentrate our portfolio further to seek excess returns, which are driven by the success of individual assets, business models and partnerships over the long term rather than merely by market price movements.”

More than 80% of the portfolio value is now concentrated in just under 100 directly held public or private assets or in external partnerships, each with a value exceeding $100m.

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