Charity Lecture 2014 - Danny Truell

Danny Truell, Chief Investment Officer of Wellcome Trust spoke at the inaugural Cazenove Charities lecture at the Tate Modern, London on Thursday 5th June.

Danny shared his thoughts on how the Trust has performed since he joined, some possible threats and concluded with general pointers for charities looking to manage a successful investment portfolio.

Over the years spent at Wellcome Trust, I have become increasingly convinced that the key issue for charities is not actually total return, but that of charity cash flow instead.

As at June 2014, the Wellcome endowment value now stands at some £17 billion, “since joining the Trust in 2005, this endowment has roughly doubled and every day that I have spent working there has seen the value increase by £5 million”.

The net outcome now is that the Trust will next year allocate £800 million to medical research, a sum which will be greater than UK Government provision through the Medical Research Council.

1. Avoiding Disaster

Danny made it very clear that he does not “wish to have, as an epitaph, the man who blew up the investment portfolio of the Wellcome Trust”.

On the other hand, the Trust has no divine right to expect any future donations to the endowment.  It is important to appreciate that, in effect, the Trust has only ever received one donation, of £1.6 million in 1936.  The current endowment value equates to growth of this original donation at a rate of 11% per annum over 75 years, or an appreciation of approximately ten thousand times.

Over the next 5 years, Wellcome will be paying out some £4.5bn towards medical research, emphasising the importance of effective management of cash flow to ensure that grants are paid.

What are the biggest threats to the Trust? 

Inflation – actually the biggest threat, for the Trust has seen a number of periods over its life where inflation has run out of control.

Concentration – too much investment concentration can lead  to severe losses during downturns.  This has been evident over the latest financial cycle.

Liquidity – risks appear from needing to sell assets (when forced to) at a bad time or when you simply cannot find a buyer.

2. Importance of luck

The Wellcome Trust has been lucky five times since its inception:

1939-45 - the decision was taken to move factories out of London, (Dartford), successfully avoiding the immediate consequence of the Blitz.  On the other hand, the charity did stockpile penicillin and by 1947 was nearly insolvent as demand for the drug diminished after the war.

1970s - effectively a purple patch for the company, thanks to the activities of two great Americans, Gertrude Elion and George Hitchins.  So while the 1970s were actually a very bad period for other endowments, Wellcome’s sales rose tenfold.

2000-03 - Much of the endowment was invested in equities, exposed to the market which was about to sell off dramatically.  All of a sudden, Glaxo appeared with a bid for Wellcome and the Trust swiftly acquired 100 million Glaxo shares at an attractive price, bucking the downward trend in markets.

2008-09 - the endowment portfolio, by the time of the credit crunch, had become considerably more diversified, with significant investments outside the UK including dollar cash and hedge fund allocations.  However, the Trust had hedged much of the exposure back to £ and with sterling falling, the cash flow implications were significant.  By great fortune, $/£ rates then went the Trust’s way after all.

To avoid pitfalls and manage risks the key has been cash flow management along with a healthy dose of luck.

3. Achieving victory instead

Proper diversification started in 1985 and continued successfully through to 1995, moving the investment portfolio more towards assets generating real returns.

However, through many of these years, the Trust’s investment policy was at odds with the Charity Commission’s recommendations.  In the Courts, Lord Justice Hoffman ruled in favour of Wellcome allowing private equity and venture capital investments, opening up the opportunity to capture the illiquidity premium on offer in such funds. which now constitute a significant part of the portfolio.

In 2006-09, the Investment Committee took great advantage of market timing opportunities and commensurate with this, a policy of using the Trust’s balance sheet responsibly was also initiated.  The issuance of long term, highly rated bonds (e.g. for 45 years at 4%) has been successful, with the mechanism also now adopted by University of Manchester and Oxbridge institutions as well.

4. Other critical lessons for charity portfolio management

  • Watch out for over-diversification – while the concept of diversification is important, the mantra can also be overdone.  The possession of literally hundreds of indirect holdings is simply no good, and likely to give the return of the markets only. 
  • Wellcome has 85% of the current portfolio of £17 billion in holding unit sizes of US$100 million at least.  In addition, external managers are strongly encouraged by the investment team to have portfolios of 30 or 40 stocks maximum.
  • Adopt a 10 year horizon for the successful evaluation of your investment choices, no less, and always retain a degree of flexibility in this stance to reflect market conditions.
  • Think hard about potential investment opportunities that you can access which may not be available to other market participants.  Thinking in countercyclical terms can be highly profitable given sufficient investment horizon.  You should to be able to stick with your positions for the longer term, if necessary to achieve a better return.
  • If you can, thrive on the positive achievements of your predecessors and take opportunities to build upon them.

Wellcome can indeed do things that other smaller charities cannot do.  However, the philosophy and approach has lessons for charities of all sizes.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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