Danny Truell is taking a keen interest in the 2012 Olympics, although it is the legacy rather than the event he is focused on – at least professionally.
The Wellcome Trust, where Mr Truell is chief investment officer, is one of nine bidders for the Olympic village, which will be converted into 2,800 apartments after the Games, and has also put in a £1bn ($1.6bn) bid to buy the bulk of the Olympic Park freehold in order to create a science and technology centre.
Property currently represents about 10 per cent of the investment portfolio of the £14.5bn health-oriented charity. Unusually for an institutional investor, though, the focus is on residential rather than commercial real estate.
This is partly a consequence of the Trust’s ownership of the South Kensington estate (a portfolio of some of London’s most upmarket residential areas), but also reflects Mr Truell’s belief that the long-term supply and demand dynamic of housing is attractive. Although most of the portfolio is in “prime” residential, there are also investments in student accommodation.
Mr Truell’s approach to running money is unusual in other ways too. He believes flexibility is the key to investment success – an attribute he says most commercial investment managers do not share. He speaks from his experience in City fund management, which also informs his view on taking on external clients: put simply, he is not interested.
With clients comes compromise and restriction, and that is not the way to deliver the inflation-busting returns needed to fund the research the charity supports. “We have one client – ourselves. That gives us the flexibility we could not have in a traditional asset management house.”
The emphasis on flexibility means he does not believe in strategic asset allocation – the traditional approach to institutional fund management of specifying a target asset split. “No one has ever got rich from a correlation matrix,” he says.
Instead his 21-strong team seeks out growth wherever they can find it around the world. “We have the ability to go out and look at a complex and broad range of assets. We exist in perpetuity and can determine our own destiny.”
It is an approach that largely appears to work, judging by returns. According to the annual report for 2010, the annualised return over five years was 6.6 per cent (3.9 per cent after inflation). Over three years it was a less impressive 1.2 per cent (-1.7 per cent real), but the 16 per cent return generated over the past two financial years has more than offset declines in 2007/08, and the fund reached a record high at the end of September 2010 after spending £678m on its charitable commitments over the year.
The merits of flexibility became clear during the financial crisis. Mr Truell, who joined in 2005, had been growing wary of excessive leverage in the financial system and sold £5bn of equities, private equity buy-out funds and commercial property in the three years leading up to September 2008, lowering his exposure to equities by almost 30 per cent.
“It put us in a good position in terms of liquidity and we used that liquidity in late 2008 and 2009 both to buy mega-cap multinational equities and also to increase our direct investment in private companies from £90m to over £500m.”
The timing was nearly perfect, allowing Wellcome to snap up shares in global brands such as Google, Microsoft and Coca-Cola at rock bottom prices. But an unusual feature of Mr Truell’s strategy is his approach to unlisted equities, with a focus on venture capital rather than buy-out private equity, and a substantial portfolio of direct investments in private companies.
The Trust also has direct relationships with 30 hedge funds that make up 17 per cent of its portfolio and when it comes to emerging markets, Mr Truell takes a characteristically flexible stance. “Sometimes we want to own local equities, sometimes the multinationals that benefit from growth.”
He is wary of bubbles that can build in emerging market valuations – “as events change you have to change your mind” – but sees opportunities in Chinese property, the Middle East and sub-Saharan Africa, despite the political turmoil in the Middle East.
Mr Truell does not believe the costs of such a sophisticated approach are problematic – “the net returns are what we are interested in” – but he places significant weight on his inhouse portfolio management team.
Although two-thirds of the portfolio is managed by more than 60 third-party fund managers, Mr Truell has brought a substantial proportion back in-house, from just 10.5 per cent in 2008 to 26.5 per cent. His reasoning is that it is not easy to find external managers with a similar culture to Wellcome’s.
“We have some incredibly good fund management partners around the world. Too frequently other managers’ business models have been given priority rather than world class returns,” he says. “One of our advantages is that we have no interest in growing assets under management. Everyone here is focused on the performance of the Wellcome Trust’s investment portfolio.”
Mr Truell’s early career was spent at the British Coal Pension Fund, which ran its equities and private equity in-house. He believes the over-reliance on third-party investment managers has not been good for pension funds. “It has been unfortunate to see how trustees, given that they control huge assets that bring great benefits to millions of pensioners, have shifted too many responsibilities out of house while not derisking effectively. That has to some extent contributed to the inevitable decline of corporate pensions.”
But with growing concern about rising inflation, Mr Truell’s focus on this threat is redoubled. Outpacing inflation means buying assets “with real cash flows”, such as mega-cap stocks, growth economies, venture capital and prime residential property. It is proving an increasingly tough challenge, but the Olympics bid shows Mr Truell is ready to move when opportunity knocks.
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