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Wellcome Trust returns 18.8% after taking Brexit bet on sterling

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A tactical bet on the outcome of the UK’s EU referendum helped push investment returns at the Wellcome Trust – the UK’s largest charity – to 18.8% for the year to 30 September, compared with 6.1% for the previous year, and taking its investment assets to £20.9bn (€24.9bn).

The results take the annualised return over three years to 13.3% per annum, and over five years to 14% per annum.

While not predicting the “surprise result” of the EU referendum, the trust said it had already diversified its portfolio globally over the past decade to reduce significantly any home country bias.

But this policy was intensified in the run-up to last June’s vote.

The Wellcome trustees’ report said: “Tactically, we viewed the risk to sterling from the referendum to be asymmetric and reduced our sterling exposure (including hedges) to an all-time low ahead of the vote. Sterling’s subsequent depreciation and the generally steady performance in underlying assets enabled us to record a sterling return in the year of 19%.”

At end-September, 58.1% of Wellcome’s portfolio was denominated in US dollars, compared with 23.8% in sterling.

Asian currencies made up 8.5%, with a further 4.1% in European currencies.

The report said: “Our global diversification enabled us take advantage of the sharp depreciation of sterling over the year. It also provided the rating agencies with the confidence to maintain our coveted AAA/Aaa (stable) credit rating, even as they were downgrading that of the UK government.”

Danny Truell, managing partner of investments at the Wellcome Trust, said: “The portfolio has again performed well in a difficult environment for many investors. The decision to reduce home country bias and to diversify assets and geographical exposure has borne fruit.

“Although future investment returns are unlikely to match recent experience, we remain confident the portfolio should generate sufficient cash flows to insulate the trust from potentially more difficult conditions.”

In terms of performance by individual asset classes, public equities – 50.5% of the portfolio at end-September – were led by growth markets with a 29.9% return, followed by global (28.6%) and developed world equities (24.6%).

But all these were lower than the MSCI AC World return of 31.3%.

In their report, the trustees criticised the “poor” performance of their outsourced public equity strategies.

The report said: “Of our 11 external equity managers, with £4.2bn of our investments, eight underperformed against their reference benchmarks, in each case by at least 5%. Although nine of the 11 are still ahead of their benchmarks over five years, warning bells are sounding.”

And it said active public equity managers, particularly in the US and Europe, were confronting three powerful and correlated headwinds: a long-term structural bias against mega-cap companies, performance measurement periods that engender pro-cyclical behaviour; and the accelerating shift from active to passive index management.

Over the past decade, the trust has reduced its external active management in global and developed market mandates from 85% to around 20% of its public market exposure.

In contrast, all five of its external managers for emerging market equities have beaten their benchmark since inception.

The best-performing class for private equity – which as a whole makes up 25.2% of the trust’s portfolio – was large buyouts, with a 34.9% sterling return (though the US dollar return was 15.6%); mid buyouts and specialist returned 25.7% and 24.9%, respectively, compared with an MSCI AC World return of 31.3%.

But hedge funds made -0.7% over the period, the only strategy boasting positive results being directional funds, with a 0.8% return.

Hedge fund exposure has been more than halved from 23% in 2008 to 10.7% in 2016, with some funds sold to increase exposure to equities.

Wellcome’s real estate portfolio failed to repeat the double-digit returns of the previous year, with a 3.2% return for the year to end-September: 3.6% for residential, and 0.5% for non-residential, portfolios.

Residential property – concentrated in prime central London units – makes up just over half the allocation.

Over the year, the allocation to property fell by 2.7%, to 10.2% of the overall portfolio.

The report said: “Uncertainty induced by the impact of Brexit and downward pressure on London super-prime residential activity created by higher taxes caused headwinds for our predominantly UK property interests. Active management enabled us to record modest positive returns.

“Uncertainty about Brexit might well create further attractive opportunities for our patient long-term capital.”

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