Wellcome sees 15% return boosted by in-house capacity
The Wellcome Trust, the UK’s biggest charity, returned 15.4% on its investment assets for the year to 30 September 2014, boosted partially by its in-house team.
The return was £2.5bn (€3.1bn) on an investment portfolio value of £16.4bn at the start of the year, with investment assets now worth £18bn, after cash payments to fund medical research, the Trust’s main activity.
Danny Truell, the trust’s chief investment officer said: “Our internal investment team and external investment partners have again added significant value across the board, enabling us to perform better than global stock markets with considerably lower volatility.
“Prospective investment returns are now lower, but, with strength in breadth and depth across our investment team and the businesses and partnerships in which we invest, I am confident that we can continue to reinforce the Trust’s robust financial position.”
The trust has returned an average 10.2% per year over the past ten years, and 10.4% per year for the six years since the start of the global financial crisis in September 2008.
All major elements of its portfolio – public equities, hedge funds, buyout funds, venture capital and property – made double-digit returns for the year to 30 September, and have made positive returns over one, three, five and 10 years.
Nearly half – 49.4% – of the trust’s assets are invested in public equities, with 25.8% in private equity, 11.1% in hedge funds, 10.3% in property and the rest in cash and bonds.
The trust does not invest in companies deriving a material turnover or profit from tobacco or tobacco-related products.
In their annual report, the trustees said: “A key common feature across the portfolio was the stronger performance from our directly-managed assets compared with those outsourced to external managers.”
The proportion of assets managed directly, excluding overlays, rose by 6 percentage points to 42%, up from 26% four years ago. The trust expects it to reach 50% by 2016.
The report said that while there were areas where the trust was content to pay higher fees to external managers in order to access superior net returns, managing assets directly has several advantages.
The approach allowed the trust to express long-term views on parameters such as the US dollar or technology by using an integrated combination of its very stable and liquid equity Mega-Cap Basket (MCB), plus a number of overlays including the new commodity overlay, which were al liquid enough to cover billions of dollars of notional exposure.
The trust said the function could simply not be outsourced.
Furthermore, almost 60% of the trust’s public equity exposure was in directly-held equities, principally the 31 stocks in the MCB and the 12 stocks in the Optionality Basket. The average holding size of $200m (€162m) meant that individual names can impact overall returns.
The report said: “Our focus is on 10-year total return targets. Hence we can focus on the evolution of long-term business models rather than short-term share prices in a way that is much harder for an external manager.”
This philosophy extends to its property holdings (90% directly held). For example, in agriculture, the trust acquired the Farmcare farming business from the Co-operative Group for £249m last August to become the UK’s largest lowland arable farmer.
Private equity also produced substantial gains over the year, especially from initial public offerings. Eight companies in which the trust had at least a $10m stake were listed or acquired during the year, boosting an overall cost of under $300m to a realised or unrealised value of almost $1bn.
The largest monetary gain of $191m was made in Twitter, the social networker, while the trust’s stake in Alibaba, the Chinese e-commerce company, made $162m.
Turning to the global outlook, Wellcome said it would retain its US bias for the present.
The report said: “Having approximately 60% of our assets in US dollars has helped us considerably over recent years, as the US equity market has outperformed world markets by 25% in the past five years and its private equity and venture markets have similarly been robust.”
But it was less sanguine about Europe, where it sees little immediate prospect of resolving structural problems.
It said: “In many countries including the UK, France, Spain and Italy, populist politics appear to have largely derailed progress in driving public-sector supplyside reforms to restore fiscal balance through greater efficiencies. The European Central Bank monetary stimulus programme has stalled, while banks remain constrained from supplying credit.”
The trust has hedged out exposure to the euro and is holding sterling exposure to just over 25%, as it considers both currencies appear vulnerable to further depreciation against the US dollar.
It said: “Overall, our long-run expectations, whilst still attractive, have moderated. We are not persuaded that there will be a substantial return premium for higher risk or illiquid assets after the strong performance of the past five years.”
It concluded: “We shall remain opportunistic and seek to broaden our sources of net returns using our intrinsic competitive advantages, but with a focus on preserving our real wealth.”