The recent histories of the FTSE 100 and the FTSE All Share eloquently describe the challenges facing investors. Investing in these indices just over 16 years ago on 1st January 2000 would have generated a compound return, including dividends, of less than 2.5% in the case of the FTSE 100 and just under 4% for the All Share.
In our experience, inflation in investors’ cost of living runs substantially higher than RPI, but even if we accept RPI as a valid factor of purchasing power, an investment in the FTSE100 would still have eroded during that time. The FTSE All Share would have fared better, but still compounded below 2% per annum. And all of this after seven years of QE, and before fees and tax.
Asset allocation, for us, is driven by the opportunities that present themselves, rather than a pre-determined set of weightings. So whilst we approach investing globally, BACIT’s investments are not proportionate to any independent metric of global activity, such as GDP or size of equity market. They are rather a balanced and risk-adjusted representation of the most attractive opportunities we believe we have encountered to date, given the medium-term horizon. We currently see opportunity in areas as diverse as relative value commodities, interest rates, foreign exchange, tech venture capital, and infrastructure investing. Each of these has its own idiosyncratic drivers which should allow it to perform on a trajectory uncorrelated to equity markets.
Which brings us to perhaps the greatest challenge facing investors who value the security of regulated listed markets: that so much of the growth of this ‘new economy’ is taking place in unlisted companies, and destabilising the listed companies that tend to represent the incumbent industries. One of the most visible examples is in power generation, where coal-fuelled power is being replaced by solar and wind. The problem for investors is two-fold. Firstly that the former are well represented by listed companies, but most of the latter are not; and secondly the rate of growth of these new technologies. The thing about exponential growth is that when you’re at 1% you’re halfway to 100%. For an industry doubling each year it takes less than seven years to grow from 1% penetration to market saturation.
The Institute of Cancer Research, London, is one of the world’s most influential cancer research institutes, with an outstanding record of achievement dating back more than 100 years. Today, the ICR is ranked as the UK’s leading academic research centre, and leads the world in isolating cancer-related genes and discovering new targeted drugs for personalised cancer treatment. The ICR employs leading scientists from over 50 countries around the world. Since 2005 alone, 16 drug development candidates have been discovered based on ICR research, 6 of which have progressed to phase 1 clinical trials. The ICR has charitable status and relies on support from partner organisations, charities and donors to fund its research and innovation.
The level of innovation, driven by the explosion in data processing power seen in the last few decades, is materialising in a series of parallel digital revolutions in medicine (genetics), energy (alternatives) and technology. The resultant increase in the quality of life for so many people simultaneously, was perhaps last seen in the West in the early 20th Century.
Finally, the secondary impacts of these mini-revolutions are as yet unknown, but will be significant: evidence the oil price collapse seen over the last eighteen months, effectively a global fiscal stimulus worth around $1.5tn to the world’s consumers, or 2% of global GDP. There are far fewer oil producing than oil-consuming countries, and many of these producers rely heavily on oil revenues to fund programmes that maintain regional stability. These factors have contributed to the geopolitical instability that has burgeoned in the last three years. The continuing EU crisis, the aftermath of the Arab Spring in the Middle East and Europe, and the posturing of World Powers in the South China Seas all remain tail risks for now, but the scope for a policy mistake has grown significantly.
The opportunity set is now far richer than is typical at this advanced stage in the conventional economic cycle, but taking advantage of these opportunities is only possible by embracing short-selling within your investment strategy as investors cannot buy into unlisted companies. Developed, liquid equity markets remain an attractive way to play both long and short opportunities and we look for fund managers who exercise greater control over the destination of their portfolios by the use of shock-absorption and shock-evasion: a margin for error has a value, as does the option to change your mind, and given a landscape that is dominated by disruption, the ability to short has come into its own.
BACIT gives 1% each year to charitable causes: 0.5% to the ICR and 0.5% to the BACIT Foundation. BACIT also has the ability to invest up to 1% of NAV each year in early oncology drug discovery candidates and med tech opportunities. To this end BACIT has committed £20m to the CRT Pioneer Fund, a joint venture with Cancer Research UK.
