The chief investment officer of the massive charitable fund raised almost $3 billion at ultra-low rates. Sometimes the long view can be the most profitable.
The £36.8 billion ($72 billion) Wellcome Trust’s smartest trade over the last decade wasn’t what it bought but rather what it sold.
With interest rates at their lowest point in a generation, the charitable foundation – started in 1936 with the wealth of pharmaceuticals magnate Henry Wellcome – issued a £750 million, 100-year bond in 2018 and then later a 50-year bond of the same amount in 2021.
The trust locked in interest rates of just 2.5 and 1.5 per cent.
“It was a moment in time for us,” Wellcome Trust’s chief investment officer Nick Moakes says. “Our fixed income was eye-wateringly overvalued at that point.”
Indeed. Those securities change hands at 39¢ and 50¢ in the dollar to reflect the upward move in interest rates and the decades of payments that have to be repriced.
But for the Wellcome Trust, that cheap long-term financing has “created vast amounts of value”, says Moakes.
He is among the headline acts at this year’s Sohn Hearts & Minds investment conference, which will be held in Adelaide for the first time. Just 24 hours before he announced his retirement, Moakes offered some insights he has garnered from two decades of running the monster portfolio.
Taking the long view
“If you take a 50-year view on this stuff, which effectively an endowment needs to do, this is noise,” Moakes says of investing Wellcome’s funds. It is the largest financier of scientific research in the United Kingdom after the government – into a sharemarket powered by big tech firms.
Moakes joined Wellcome in 2007, which had £15.1 billion in assets. He took over as CIO in 2017. The portfolio stands at £36.8 billion now, and more than £15 billion has been awarded towards funding health-related scientific projects, including in Australia.
In December, the trust awarded $5.4 million to a University of Sydney team to study how disruptive sleeping patterns could cause depression and mood swings.
Last month, it handed $4.9 million to a University of Melbourne team to study the impact of climate on farmers in Kyrgyzstan in Central Asia.
“What sets us apart from most people running money is that we don’t have any clients,” Moakes says. But that does not make the job simple. Although Wellcome determines how much risk it will take, Moakes says this requires watertight governance to make sure the best decisions are made.
Innovation equals productivity growth equals outsized returns. That equation isn’t going to change, in my view.
— Nick Moakes, CIO of the Wellcome Trust
Wellcome must also stay nimble and liquid enough if a call comes to fund a scientific investment. “I don’t know when the organisation is going to come to us and say that we need to spend a billion dollars really quickly because we can make a huge change to health outcomes,” Moakes says.
Moakes is a globally focused investor but has a deep affinity with Australia and the cause of financing medical research that the Sohn Hearts & Minds event has championed. His grandfather, H.E. Graves, moved to Australia in 1925, spending a decade in the West Australian police force.
Graves returned to Britain in 1935 – having penned a memoir, Who Rides – just in time for the outbreak of World War II. It was also the same time that Henry Wellcome, whose company eventually became part of GlaxoSmithKline, one of the world’s largest pharmaceutical groups, was creating the trust.
For those reasons, Moakes, who has spoken at Sohn’s London event is only too happy to book a flight to Adelaide and make his presentation in November.
The 89-year-old Wellcome Trust is steeped in history and the fund is set up to think and invest for the long run.
Moakes says this translates into an allocation of about 80 per cent to be invested in some form of equity – be it private or public. The high weighting to stocks, he says, is partly a function of the lessons learnt during the 1970s and ’80s of the wealth destruction that high inflation can cause.
‘Tyranny of benchmarks’
“That has dominated my mindset,” he says. “If you’re going to defray the risk of inflation, you need to own real assets. You need to own things where the value of the cash flows of the underlying instruments are going to grow with nominal GDP, rather than be fixed.”
But Moakes is happy not to be in the world of traditional funds management, where outperforming market indices dominated by few companies is becoming more difficult. He calls it the “tyranny of benchmarks,” as the fate of stocks such as Nvidia, Apple and Amazon determine whether fund managers meet performance targets.
“They’re fantastic companies. They’ve been built for nothing, and we’ve owned some of them in quite large sizes,” Moakes says. “But to have a portfolio which is completely focused on those things, which is what you’ve needed, puts you at a real risk of things just reversing. That’s a risk that I don’t think a responsible asset owner is going to take on.”
Where there has been a swift reversal is in private equity and venture capital. Last year, the fund’s £12.8 billion private equity portfolio took a 10.4 per cent hit mainly because of venture-related downward revaluations.
Moakes is confident those venture bets will pay off over the long run.
“The reason we have such a lot in early-stage venture investments is that innovation is increasingly going to drive the global economy,” he says. “The rate of innovation has just been accelerating. That tends to drive you more towards the US which has been the most innovative economy globally.
“Innovation equals productivity growth equals outsized returns. That equation isn’t going to change, in my view.”
Wellcome has also allocated money to hedge funds in the hope they can deliver higher returns. “It’s smart people doing things that we cannot do in a structure that controls the risk for us,” Moakes says.
But do hedge funds deliver the results relative to the fees they charge?
“If you look back through our exposures over time, you will see that in September 2008 we had 23 per cent of our assets in hedge funds. As of the end of last financial year, that was about 10 per cent,” he says.
On the other end of the spectrum, the trust holds about 9 per cent of its assets in cash. “That, in part, reflects the fact that we’ve struggled near term to find things that we want to deploy money into,” the CIO adds.
A cash holding is usually a drag on investment returns, but the overnight cash rate in the UK is 5 per cent. That is double the 100-year rate that Moakes helped lock in less than a decade ago.
This article was originally posted by The Australian Financial Review here.
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