Trustee’s Report (continued) Review of Investment Activities
level and productivity of savings, the change will take place slowly. In Europe, real economic growth is likely to be even slower as policymakers are forced to unwind the credit arbitrage that has been created by common interest rates across the Eurozone and the balance sheets of banks are restructured. Many faster growing economies face the challenge of inflationary pressures as they rebalance from export-led to domestic consumption-led economic models.
These macroeconomic factors are reflected in our allocation of assets. We only have 15% of our net assets (Figure 5) dedicated to Europe including UK (with minimal exposure to Southern Europe), considerably less than the exposure that we have to faster growing economies. Within the 41% of our portfolio invested in equities, we have structured our investments such that 38% is invested directly in Mega-cap companies and 25% is invested in externally-managed portfolios in faster growing economies. In such uncertain economic times, we count
Figure 4a Evolution of asset allocation (%)
Public equity Private equity Hedge funds Property Cash and bonds
5.8 8.2
3.6 7.5
11.5 12.1 13.9 19.3 69.2 62.5 52.0 38.4 37.7 44.5 41.3 20.6
14.8 8.7
5.4
20.7 11.9
9.3 11.9 23.3
17.9 10.8
6.1 13.0
16.6 9.4
23.7 3.2
17.2 10.7
27.8
it an advantage to work with only very broad asset allocation constraints.
Long-term themes will continue to inform our choice of investments; the opportunities created by ageing populations around the developed world, the shift in Western economies from service-based to knowledge-based industries, the emergence of new, faster growing economies and resource scarcity. Over the year, we created new partnerships in the Arab world and Brazil spanning externally-managed public and private securities to complement our existing multi-asset partnerships in East Asia and sub-Saharan Africa. Within our directly and indirectly owned private assets, we continued to raise our exposure to venture capital where we are benefiting from our investments in consumer internet companies, and to sectors such as energy and resources.
We have, importantly, now reached the point where our portfolio has been reshaped so that we expect to generate substantial free cash flows over the next five years after meeting charitable
spend, operational and management expenses and bond interest costs. This is based largely on our expectations of realisations of our private equity portfolio and makes no assumptions about reinvestment. In addition, we have £2.5 billion invested in hedge funds which, given our time horizon, collectively create a pool of liquidity for either defensive or acquisitive purposes. In an environment where mainstream corporate assets (whether public or private) are being valued at attractive cash flow yields, our free cash flows can be used to compound growth without concern about mark-to-market valuations.
As a charitable foundation for which a major long-term threat is high levels of inflation, the current combination of negative real interest rates and tepid economic growth is not an attractive environment. Our portfolio is principally invested in assets and strategies where we seek to access long-term real cash flow growth. Through our Venture & Growth exposure we also have 19% of our portfolio invested in higher-risk
Note that the percentages exclude foreign exchange and derivative overlays.
18 | Annual Report 2011
Sept 2005
Sept 2006
Sept 2007
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Sept 2009
Sept 2010
Sept 2011
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