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The Recipe For Wellcome’s Success

To reinforce the importance of investment beliefs in long-term investment performance (see my post from yesterday), I want to direct your attention to one of the single best investors over the past thirty years: The Wellcome Trust - a fund that relies on its investment beliefs.

As I argued in my Matrix-inspired post yesterday, investment beliefs are increasingly important for institutional investors in the current era of financial market volatility and uncertainty. To reinforce the importance of beliefs in long-term investment performance, I want to direct your attention to one of the single best investors over the past thirty years: The Wellcome Trust.

The charity’s endowment has a compound annual growth rate of 14% (!) since 1986, which is better than Harvard and the same as Yale. In fact, the only long-term investor that beats The WT over this time period seems to be Warren Buffet (with a 17% IRR). In short, The WT is good – really good in fact – at the business of investing. And, based on my understanding of the fund’s operations, its success is due, at least in part, to its unique culture and rigorous set of investment beliefs.

So let’s take a look at some of the fund’s core beliefs, shall we? See if we can learn something? Here they are: 

“Sufficient liquidity must be maintained to avoid the forced sale of assets at distressed prices. However, real assets offer the best long-term growth prospects and provide protection against inflationary pressures.”

In other words, it's important to manage assets with a view to liabilities, and it is better to hold assets than products. Concur. 

“In order to maximise investment returns from global economic activity, the portfolio should be very broadly diversified with no innate geographical bias.”

In other words, avoid unnecessary idiosyncratic risks. Fair enough. 

“We seek to utilise the advantages of our long-term investment horizon, our ability to tolerate high levels of short-term volatility, our AAA balance sheet and our proactive governance structure.”

In other words, avoid trading and focus on investing. Love it. 

The best returns will be driven by combining aligned partnership with the strongest external managers and building in-house resource to own selected assets directly.”

In other words, access points matter. So think as strategically about how you deploy as where you deploy. So true. 

“We are flexible as to the nature of the vehicles in which we invest, whether public companies or private partnerships.”

In other words, investing is about getting exposure to underlying risk factors and getting compensated for those factors – the public-private issue is only relevant in as much as it adds another risk factor to consider (liquidity). 

This is all very sensible and enlightening. In fact, the only belief I'd quibble with would be the one about home bias. I tend to think there are benefits to local investments due to asymmetric information. And this asymmetry may warrant a slight tilt toward the local markets. But then again I don’t have a 14% IRR, so perhaps I should revisit my own beliefs instead of questioning theirs.

Anyway, I’ve been very impressed with everything the Wellcome Trust has done over the years. And I think it's useful to see what this successful fund believes about the world of finance and investment. 

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