Public equities In 2010/11, the 41% of our portfolio (£6.0 billion) invested in public equities showed a negative return of 5% in Sterling terms largely due to our heavy weighting towards shares in faster growing economies, whose performance retreated. Over the past three years, our equities have outperformed against world markets by 7%. Our investments have increasingly been concentrated in internally-managed holdings in a Mega-Cap basket (38% of our equities) and externally-managed holdings in faster growing markets (25%), funded largely by a steady reduction in externally-managed holdings in developed markets. We would expect to continue to reduce the use of external managers.
There are 33 holdings in our Mega-Cap basket. Each company is capitalised in excess of $60 billion, is quoted on a developed market and operates on a global basis. In line with our long-term investment philosophy, no shares have ever been sold since the inception of the basket in 2008 in any of the existing holdings. However, during the year a holding in Anheuser Busch was initiated and the holdings in Hewlett Packard and Walmart are in the process of being sold. The basket, valued at £2.3 billion, has returned 19% against cost. Each company is covered by an internal analyst who actively engages with company management to promote long-term strategic thinking.
In addition, we own a directly-managed Optionality Basket of £219 million, consisting of four companies whose operating performance and valuation appear to offer considerable upside potential given the underlying strength of their franchises. Over the year, we added to positions in Marks & Spencer and Morgan Stanley.
Figure 7 Public equity net returns
Period to 30 September Annualised return in £ (%) One year
Three years Five years Ten years
Since January 1993
Wellcome MSCI World (5.4)
7.5 2.9 5.0 7.5
Relative
(2.7) 5.1 2.0 3.6 6.4
Annualised return in US$ (%) One year
Three years Five years Ten years
Since January 1993
Figure 8 Public equity allocations by region and by direct/indirect management (£)
As at 30 September
2011 Value £m
Indirectly managed Global
Developed markets
Faster growing markets Directly managed Mega cap basket Optionality basket
Futures, options and others Total
3,584 739
1,332 1,513 2,481 2,262 219
(89) 5,976
2010 Value £m
4,211 815
1,603 1,793 2,354 2,072 282 5
6,570
2009 Value £m
4,205 978
1,670 1,557 1,855 1,649 206
(817) 5,243
2008 Value £m
5,042 1,062 2,520 1,460 160 160 — 13
5,215
Wellcome MSCI World (6.5)
2.8
(0.8) 5.6 7.6
Relative
(3.8) 0.5
(1.7) 4.2 6.6
(2.7) 2.3 0.9 1.4 1.0
(2.4) 2.4 0.9 1.4 1.1
Annual Report 2011 | 21
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