Trading insights: Long-term investing for a long-term mission, with Wellcome Trust   

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Elaina Elzinga: We want a single investments portfolio. It's one portfolio, one team, one mission with the sole objective of delivering financial returns to allow us to support the best science in perpetuity. As a science-based organization, it won't surprise you that data in all its forms is the bedrock of our decision-making. We use a range of qualitative and quantitative data in making our investment decisions and selecting our managers.

Eloise Goulder: Hi, I'm Eloise Goulder, head of the data assets and Alpha Group here at the J.P. Morgan, and today, I'm delighted to be joined by Elaina Elzinga who is principal and head of active manager selection at Wellcome Trust. So, Elaina, thank you so much for joining us here today.

Elaina Elzinga: Great to be here. Thanks for having me.

Eloise Goulder: So could you start by introducing yourself and your background?

Elaina Elzinga: Sure, so I was born in Tokyo, Japan. I moved to London at a young age, but one of my earliest memories was actually on the trading floor at J.P. Morgan where my mother works. The trading floor, I think, looked a bit different in those days but I remember vividly, I think, being around three years old, being taken into work one day and sat on a chair and a phone receiver held up to my ear and being told to say, "Buy." Obviously that sparked my interested in (laughs) finance at quite a young age. I then studied history at university and started at Goldman Sachs at the onset of the financial crisis. Learnt a lot as many of us did and moved over to the asset management arm to further my interest in investment management. When the opportunity at Wellcome came up, it was something that I jumped at. For me, it was really the chance to work with just a great team, with very bright people, work on what is a very broad and globally-diverse portfolio, investing across a wide range of assets, across different geographies. And most of all, to work for a mission that really resonated with me at the Wellcome Trust. I joined Wellcome in 2010 and since then have had several different roles, focusing on different asset classes across the portfolio. Externally, I'm a trustee for the University of Cambridge Endowment Trustee Body and I'm a non-exec director for Octopus Renewables Infrastructure Trust and for Premier Marinas, which is Wellcome's wholly-owned marinas business on the South Coast.

Eloise Goulder: Well, thank you for providing all that context and in fact, I didn't realize you had suck an early-stage link with J.P. Morgan. So coming to Wellcome Trust, you started at Wellcome in 2010. Can you give some context as to the organization as a whole and what it really stands for?

Elaina Elzinga: Absolutely. So Wellcome is a charitable foundation with a vision of a healthier future for everyone. And we do that by supporting science to find solutions to the urgent health challenges we're facing around the world today. To do that, we give away about 1.5 billion pounds per year to fund transformative research and that includes both discovery research, asking some of the most fundamental, grassroots-level questions about life and health, and it also includes focus on three areas where we're funding solutions to very specific problems where we see a real need. First is infectious disease, the second is mental health, and the third is the intersection between climate and health. About half of our funded projects are in the UK and about half are internationally and we're focusing increasingly on lower and middle-income countries there. Just to give you a flavor, some of the examples of things that we've been involved with recently, we were a founding member of CEPI, which is the Coalition for Epidemic Preparedness Innovation, which has overseen a number of scientific breakthroughs including the Ebola vaccine. We're also one of many organizations supporting the research and development of a new malaria vaccine which has huge potential to save lives.

We're working with the Bill and Melinda Gates Foundation on a major clinical trial of what would be the first new tuberculosis vaccine in 100 years. This is a disease that kills more people than any other infectious disease. So all of this work is funded from our investments portfolio which when I joined was worth about 13 billion pounds and today is worth just under 40 billion pounds. The origins of this portfolio actually date back to 1936 when we received our single gift on the death of Henry Wellcome and this was a man who had a pharmaceuticals business which was left to be managed by the trustees for the benefit of human and animal health. We've obviously long since diversified the portfolio away from the original pharmaceuticals business to what we think provides the best chance of being able to generate the investment returns to fund this science hopefully in perpetuity. We're entirely independent which give us the freedom really to focus on what we think are the biggest opportunities in terms of funding science and we're also able to invest with a true longterm time horizon which should allow us to be able to fund the science of tomorrow. The actual investments portfolio is managed by a team of around 40 people, all sat here on the Euston Road. The portfolio itself is very global and majority of it is invested internationally but we think having everyone in the same office, able to exchange ideas, and m- maintain a consistent dynamic culture is really important to us. And we also have a very carefully chosen set of managers which we think are some of the best and the brightest brains in the investment world and hopefully over time they should also allow us to fund the best and the brightest scientists.

Eloise Goulder: That's fascinating to hear how you're really able to play to the longterm both needs of society through health and climate but also to have that longterm focus through your investment portfolio and to think of the growth you've seen in that portfolio since you joined in 2010 from 13 billion to nearly 40 billion pounds. And then moving to the investment side itself, you're obviously head of active manager selection, so could you talk about what this role really entails?

Elaina Elzinga: So it's a relatively new role. These are asset classes that we've had exposure to for a long time but they've historically be split up into coverage amongst different teams. But putting these assets together allows us to be true to our philosophy of maximizing competition for capital within the portfolio and to ensure that we're selecting the best longterm partners for us. And by that we mean the ones that are most likely to deliver the best risk-adjusted performance over the longterm and exceed our target of 4% real. So of course there's a wide range of different strategies by which managers can deliver returns in active markets. At one end of the spectrum, it could be a small boutique long only emerging markets manager. On the other hand, we can choose to invest instead in a global multi-PM hedge fund with a short-term investment time horizon but the capability to invest in its people and its data to a very high level. So we should be able to step back and consider which of those models we think is going to deliver the best longterm returns for us to achieve our objectives. And to think about organizational durability as well as to really dig into the manager's investment processes and how we think this feeds through to repeatability of strong longterm absolute performance.

Eloise Goulder: So interesting to hear all of that context. The fact that you're spanning investment managers from the long-onlies in emerging markets to the multi-PM hedge funds with a much shorter time horizon and I'm glad you brought up data, technology, because that's a- an area I'd love to dive into. This idea of that with a much short average investment horizon from those sorts of hedge funds, they might be tapping into sources of technology and data that you could not otherwise tap into and there could be a source of competitive advantage there.

Elaina Elzinga: Absolutely. And there's so many different ways to generate returns and to generate alpha, and we want to make sure that we have a range of those that we think are best suited to our objectives and that we're really backing the managers, playing the best tailwinds but then giving themselves the best chance of generating that alpha in a repeatable way.

Eloise Goulder: So how do you go about constructing your portfolio and how do you think about the relative allocation between each asset?

Elaina Elzinga: So for us, this isn't as simple as following some strategic asset allocation formula. Instead we believe that we're going to deliver the best returns by maximizing competition for capital on a bottom-up basis. And the hope is that that should allow us to lean into areas when others are moving in the other direction. We want a single investments portfolio. It's one portfolio, one team, one mission with the sole objective of delivering financial returns to allow us to support the best science in perpetuity. So we exist to fund the mission in the investments team, not to be the mission. And the portfolio as a whole is constructed to maximize the probability of attaining a level of return that at least preserves the longterm real value of our assets and hopefully does better than 4% real. Different parts of the portfolio will inevitably play different roles but as a longterm investor, our natural home is in equities, so we are equities heavy, public and private equity combined make up about 3/4 of our portfolio. And on the flip side, we have minimal exposure to fixed income. Another important point to make that can differentiate us in some peers is how we think about risk. We define risk as risk of permanent loss of capital. We don't use volatility as a measure of risk. For us, volatility can be an opportunity rather than a risk.

Eloise Goulder: And it comes back to my bugbear with sharp ratio or this idea that vol on the downside should be equally weighted to vol on the upside because of course, vol on the upside is perfectly fine, in fact, a very good thing.

Elaina Elzinga: Mm, and vol on the downside even can present us with a great opportunity to rotate some of our cash, for example, into-

Eloise Goulder: Yeah.

Elaina Elzinga: ... equities or partners that we've been watching for a long time.

Eloise Goulder: Yeah, so interesting. So you touched on data and technology in the investment process earlier. We're obviously going through such a rapid pace of change in technological advancement, compute power, data availability. Elaina, how are you using these advancements and factoring these advancements into your asset manager selection?

Elaina Elzinga: So as a science-based organization, it won't surprise you that data in all its forms is the bedrock of our decision-making. We use a range of qualitative and quantitative data in making our investment decisions and selecting our managers. And actually I'd say we're not in the habit of over-quantifying things that can't yet accurately be quantified. I think ESG is an interesting example here where of course there's many attempts to put numbers on it.

Eloise Goulder: Yeah.

Elaina Elzinga: Some of them are good, some of them are perhaps less good, so for us, ESG or license top operate as we call it is about a materiality-driven approach and takin gon board a range of qualitive factors. So we're not in the habit of over-quantifying data where it's not useful, where the data isn't yet up to speed. I would think of using data on two levels. First the how we assess our partners in their use of data and AI and then secondly, how we are using this internally. So for our partners, we generally want to be backing managers that have a strong competitive edge. So for those who are very focused on use of data and used to investing large amounts in this, we would be expecting improvements in generative AI to open up opportunities and to play to their strengths. For other partners though, I think they're now being caught in a arms race and potentially forced to invest a large amounts of money just to stand still. One of our managers, for example, recently acknowledged that AI infrastructure is the most rapidly depreciating infrastructure that they would ever build and yet they still feel the need to keep doing this, otherwise they might end up behind. So I think it's a challenging position for some managers to be in. To the second part of the question, how do we use data in our investment process, as an organization looking to fund to best science, it won't surprise you that in the investments team, we place a huge reliance on data and a big range of it. For example, we're putting a big focus on how we can improve our use of quantitative data to assess whether a manager has skill in things like sizing or execution where this forms part of their strategy. On AI, we don't feel that we need to be the first or even necessarily an early mover here. We will watch and adapt as appropriate to our philosophy. Wouldn't be appropriate for us to be throwing a lot of resource into this when there's very uncertain returns at this current stage. We have great dialogue with other asset owners and we're often exchanging ideas on what is working and what's not. We're open-minded there will be opportunities but also that a lot of investment could be wasted and there's a big risk of false starts. We also do need to keep a real eye on the carbon impact of AI as well.

Eloise Goulder: So interesting to hear your comments about AI and the investment not necessarily paying off, being very uncertain given that this is so novel and depreciating very rapidly. But at the same time, managers are saying that they need to do the investment anyway just to stay ahead. And from what I'm hearing, you are favoring managers who have scale, who have the benefits of scale to invest in tech as a whole, is that right?

Elaina Elzinga: I'd say that's generally true, not as an exclusive rule. I think there's still opportunities for niche managers who have never relied on huge investment in data as part of their edge and they will have their edge in other areas, in sourcing of opportunities or in their networks with certain entrepreneurs, for example. But I think it is fair to say that particularly in certain hedge fund strategies, it can be more of a winner-takes-a-lot model and we do tend to favor the larger part. And it's been also those that are the way of discipline are still thinking about return on caps invested and are disciplined in the way that they manage their capital base.

Eloise Goulder: And you mentioned ESG and climate. Given your focus on longer-term investment dynamics as a whole, how do you think about climate change and sustainable investing in this sense and do you draw from Wellcome Trust's own research in this space into your investing decisions?

Elaina Elzinga: Wellcome's research has focused on things like the impacts of heat on maternal and fetal health. And we've also worked with the Geneva Association on a report that we commissioned as part of our charitable work to show the financial consequences of climate change on the insurance industry. One of the key conclusions from our research is obviously that these trends are very hard to predict. In the investments world, we're used to many of the key trends of our time and previous eras being S-curves rather than linear trends and that's true about climate change as well. That's, there is a danger to relying too much on quantitative data or data that isn't yet fully sophisticated. I think we need to think about the risks of climate change on a more holistic level and we do this as part of our regular analysis of a company's license to operate both when we're underwriting an asset for the first time but also on an annual basis as we review this thinking about a materiality-driven approach. For example, we have significant exposed property in our portfolio, both residential and some commercial property. We need to think actively about adapting these assets in the face of climate risks and also investing in these assets to ensure that they're keeping up with the energy transition. This obviously does have some challenges. For example, we do need to comply with local heritage restrictions which can come into conflict with our desire to invest to insulate these buildings. I think there's more local government can do here to help homeowners and investors to marry those conflicts. Unlike some other asset owners, we don't have a dedicated climate solutions bucket which wouldn't be in keeping with our philosophy of having an un-siloed portfolio that maximizes competition for capital, but I am convinced that given the longterm trends underpinning the energy transition, there will be new business models and investment opportunities that arise given the scale of capital involved and required here given the tremendous generational importance of the energy transition. There are some challenges in the fact that this is inherently a highly capital-intensive area and some of the investment for example in renewables and in the grid is by nature of a lower risk return profile than Wellcome's cost of capital so we need to make sure the right opportunities end up being matched by the right private or public investors. Across our portfolio, we aim to be net-zero by 2050 at the latest. We don't take the approach of just excluding the more carbon-intensive sectors together. Instead, we need to be engaging with our underlying assets and their managers to encourage them to adopt a science-based targets and push them on their transition plan.

Eloise Goulder: Can you provide further context there?

Elaina Elzinga: So sometimes I think people get overly caught up in specific numbers and detail, rather than standing back and thinking, "What is the actual purpose of this company or manager? What are they trying to achieve?" So for example, one of our larger public equity holdings is a large European industrial gas company. They also have one of the largest carbon footprints in our portfolio based on their [inaudible 00:18:31] one and two emissions. But actually when you step back and think about what they're trying to achieve through their work and how they're generating their cash flows is by helping customers reduce their carbine footprint through carbon capture projects and ultimately through the supply of clean hydrogen. It is important to us that they, for example, have a science-based net-zero target and that they're making good progress towards reducing their absolute emissions. It's the same thing for the steel sector and the cement sector where some investors might just exclude them because the carbon footprint looks very high, but actually if that company and the management team are really engaged with the longterm energy transition and reducing the carbon impact of its products in the way they manufacture them, I don't think that's something that investors should be excluding form their portfolio.

Eloise Goulder: It's really fascinating to hear about the trade offs that you sometimes face between, let's say, the absolute climate impact of a given company versus the rate of change. And so ih- to hear your points about these rates of change not being linear. The climate change certainly isn't linear and the pace of technological change right now certainly isn't linear either and the fact that traditional more linear quant models aren't necessarily going to be good enough at forecasting the future. Well, final question for you, Elaina. From this incredibly broad lens, where do you see the greatest asset growth potential on, say, a 5 or a 10-year view?

Elaina Elzinga: So I'll just dust off my crystal ball, but trying to answer at a portfolio-level, I'm generally bullish on business models that have a positive flywheel effect and defensive moats. Whether that is a leading venture capitalist, whether that is a multi-PM hedge fund that has the scale to really invest in its people, in its infrastructure, and its data but which also has crucially sufficient discipline over the capital that it manages and is willing to constrain capacity, but it could also be a g- make a cap company that have high barriers to entry, we like things with good network effects, with good capital discipline, with high R&D and good returns on R&D. Whilst incumbents who are doing this effectively today will inevitably have an advantage and might be hard to beat, those names won't necessarily be the same ones in 10 years' time, so we need to be open-minded and continually scanning the landscape to see who is nipping at the heels of those well-entrenched incumbents and who is inventing or coming up with new business models and new data edges to allow them to compete and eventually take ground.

Eloise Goulder: That makes so much sense and as we all know, when these companies do have high barriers to entry, high moats, they often trade on premium multiples because of that high growth, but when they lose it, that multiple can considerably de-rate, so you sort of lose on both the earnings and the multiple, so it makes total sense to be that you really have to be on the lookout for where certain companies might lose that edge and others might gain it.

Elaina Elzinga: Absolutely. And sometimes that is a genuine loss and that moat has been breached. Sometimes it can be a short-term hiccup and actually that presents a great opportunity for us as a longterm investor.

Eloise Goulder: Well, Elaina, thank you so much for giving us all of this time and these insights on your business model. I really think what your organization is doing both in terms of the impact and also the investment, the longer-term focus, is truly inspiring, so thank you for taking the time to talk us through this today.

Elaina Elzinga: My pleasure, and thanks so much for having me. I've really enjoyed the conversation.

Eloise Goulder: Thanks also to our listeners for tuning into this biweekly podcast series from our group. If you'd like to hear more about Elaina's work and Wellcome Trust, then please do have a look at the links in the show notes. Otherwise, if you've got questions or if you'd like to get in touch, then please do go to our team's website at jpmorgan.com/market-data-intelligence where you can always reach out via the Contact Us form. And with that, we'll close. Thank you.

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