Wellcome Trust’s portfolio has not just survived, but prospered, in the highly volatile environment following the COVID-19 outbreak, according to Eliza Manningham-Buller, the charity’s chair, introducing its annual report which unveiled a 12.3% return for the year to 30 September 2020, up on the 6.9% of the previous year.
The trust, which supports medical research worldwide, is the UK’s largest charity, with a £29.1bn (€31.9bn) portfolio at end-September 2020. Wellcome’s investments have returned an average 12.1% a year over the past decade.
The entire spectrum of returns has been affected by COVID-19, the £3.7bn hedging portfolio playing a major role and returning an “excellent” 17.1%, according to the annual report.
Early in 2020, the Wellcome scientific network was sounding warnings about the potential seriousness of the COVID-19 virus, which at the time had not been reflected in equity prices. The charity raised cash levels and hedged around 20% of its public equity exposure before the market decline.
Nick Moakes, chief investment officer and managing partner of the investment division at Wellcome, said: “Sales of low conviction positions and selected portfolio hedges early in the year gave us plenty of liquidity and put us in an excellent place to benefit from the rebound in markets after the aggressive policy response in March.”
While overall exposure to public equities has been reduced to 44.8% of the portfolio, the standout performance within Wellcome’s internal portfolios came from the growth basket of emerging market equities, which returned 28%-22.3% ahead of the emerging markets index.
This was driven by large positions in leading Chinese technology companies including Alibaba and JD.com.
The report observed: “The impact of the COVID-19 virus has exacerbated the economic growth differential between Asia and Europe, making it easy to find assets with tailwinds in Asia.”
For the first time, the trust has more in its overall equity book invested in the Asia Pacific region – 26% of the equity allocation – than in Europe including the UK (24%). Virtually all the remainder is invested in the Americas.
Another stellar performance came from venture capital, 13.3% of the portfolio, which delivered 28.2%. The sector continues to benefit from rapid technological innovation and a structural shift to the digital economy, boosted this year by the impact of the virus.
The property portfolio – 6% of assets – faced significant challenges, thanks to disruption caused by the pandemic and Brexit, according to the report.
However, this was more than offset by the £748m sale of student housing business iQ to Blackstone at a significant premium to net asset value, which dominated the overall return of 9.6%.
”We expect the coming years will be a more difficult environment and have therefore been positioning the portfolio to maximise our chances of capturing excess returns”
Despite market recoveries since March, and Wellcome’s strong return, the charity had words of warning on the future global outlook.
The report pointed out that market falls in 2020 only stopped because banks started quantitative easing and governments announced fiscal support.
It said: “We suspect that the rally may have simply borrowed returns from future years, fuelled by ultra-loose monetary policy. We expect the coming years will be a more difficult environment and have therefore been positioning the portfolio to maximise our chances of capturing excess returns.”
In the equity portfolio, this has involved concentrating on liquid stocks in regions and sectors of the global economy with decent growth tailwinds. In the broader portfolio, Wellcome looks to benefit from the illiquidity premium, and from close partnerships with outstanding global investment managers.
“Our key risk control involves forecasting liquidity flows over the next five years and ensuring that projected cash levels do not fall below 2% of portfolio value over this period,” it said.