The Wellcome Trust caught the news this week. Its claims to fame this year include:
- It is the world’s second biggest charity (behind Bill & Melinda Gates).
- It has donated over £1bn last year.
- Its boss, Danny Truell, is the UK’s highest earner in the charity sector. His pay rose £1m to £3m last year on the back of excellent five year investment returns.
Continued outstanding performance
I first studied the Wellcome Trust in 2012. At that point it had about £14bn under management, and about 20 investment professionals.
The Trust has just posted strong investment returns of 19pc, takings its assets up £3.5bn to £20bn. Managed by 25 people. I’d say its boss is earning his pay.
Last year’s excellent results were largely because the Trust made an strategic decision about a year ago to downweight its sterling exposure. Apparently normally it wants at least 25pc UK exposure, but sometime pre-referendum it decided to waive that requirement. Its assessment was that the Brexit risks were asymmetric, with much greater downside than upside. This was a very similar perspective to my own call in January this year, which has served me very well too. I’d love to know how exactly they implemented the shifts involved as it isn’t easy to do without trading costs.
The fund has compounded over 15% since 1985. This is astonishing performance, of a Buffett-beating level. Over time the Trust has consistently outperformed the market, without running extra risk.
A Wellcome Trust 10 point scorecard
My assessment of the Trust highlights 10 characteristics it follows. Many of them I share, but not all. These ten points are as follows (apologies if you’re reading this on a smartphone!):
|Approach||Wellcome Trust’s behaviour||F v L?|
|1. Long-term focus||Tho management appears to be remunerated on five year returns. 80 of 95 relationships are five or more years long.|
|2. Clear asset allocation||They don’t disclose their target allocation but they clearly do have some parameters; for instance they normally want the UK to be at least 25% of their exposure (a very high UK weighting, globally).|
|3. Equities focus||It has held no fixed income since 2010, as far as I understand it. It sees its investment horizon as infinite, and its key risk as inflation – so it likes real assets (bricks & mortar, equities, etc).|
|4. Unafraid to time markets||The Wellcome Trust got out of fixed income entirely in 2010, it is now upping its exposure to commodities. It makes calls.|
|5. Confident active investment||It makes direct investments and via third parties, roughly half each. It believes “most investors are over diversified”, and has relatively concentrated positions : 95 core relationships of $100m+ are 85pc of portfolio. It has four big investment themes and wants to invest behind these.|
|6. Consistent management.||Its boss was appointed in 2005, over 10 years ago. That’s a good start.|
|7. Clear approach to expertise||The Wellcome Trust isn’t a fees zealout. It has a clear perspective on where it has expertise and where it doesn’t, and it’s not afraid of paying fees for outside expertise. It does expect performance; while in 2014 it was bragging that 12 of its 14 external managers had outperformed, its language this week about the recent lagging performance must be sending shivers down those external managers’ partners. While they don’t mind paying fees, they don’t like ‘asset gatherers’ – funds who view increasing assets as a goal in itself.|
|8. Hatred of trading costs||Mr Truell describes trading costs as headwinds. One remarkable 2014 stat was that their holding of 32 blue chip stocks hadn’t changed at all over two years – not many of us could say that.|
|9. Modest gearing||The Trust borrows about £1bn, a sum matched by its cash-at-hand. Ltv of 5%. This borrowing allows the trust to “remain fully invested”. Realistically there is no risk at all from borrowing your cash-at-hand position, just a cost of borrowing; that Wellcome does this shows confidence that it can sustain higher investment returns than its cost of debt over all realistic market conditions.|
|10. Follows Buffett’s first and second rule.||The first rule? Don’t lose money. The second rule? Don’t forget rule one. In 2014 Wellcome’s boss described their sole loss-making-over-five years position, Telefonica then down 1pc, as ‘irritating’.|
What is FIRE v London’s score?
There’s only one of the Trust’s approaches that I definitely don’t aim to follow myself – trying to make bold market calls. But I also don’t try hard enough to follow Buffett’s first and second rules; I have plenty of positions that lose money and I see that as part and parcel of investing. So I think my theoretical maximum score is 8/10.
And I don’t think I score as highly as I’d like on four of these principles.
While I am comfortable gearing, i.e. debt-financing my portfolio, my overall level of about 30% is not sufficiently modest to give myself full marks. Half a mark only.
While I am mindful of trading costs, and I do use low-cost execution-only brokers for nearly all of my trades, I don’t think I deserve full marks here either. My median trade size is under £2k, which means the trading cost alone is over 0.5%. And I do sell things – usually unwisely – to trade into others.
I am normally very equities-focused. But in the last twelve months, especially while I have a geared portfolio, I have deliberately tried to increase my fixed income allocation. This is to reduce the overall volatility of my portfolio. This looked like genius for most of this year due to the continued boom in fixed income. But longer term I am running inflation risk – admittedly one I think is well hedged with my property holdings outside my core investment portfolio. So I certainly wouldn’t give myself the same score as the Wellcome Trust.
And lastly, the confident active management piece. There is almost no discussion of ‘passive investing’ in any Wellcome Trust commentary I’ve read. It is an unashamed, out and proud, active investor. I, on the other hand, am dancing with the devil in the pale blue moonlight; I know active investment isn’t rational as I can’t really hope to sustain outperformance against the market, but I enjoy it – and so I continue. But I lack the confidence to deliver great returns if I turn out to be any good. About 50% of my total exposure is passive. So I give myself half a point, not a whole point.
Overall I grade myself 6/10. I think if I reduced my trading volumes and get my leverage down to 15% or less than I would be at 7/10, which is probably my comfortable maximum.
How would you score against this checklist? Anybody ahead of 6/10? Let me know via the comments.