Compound interest: the eighth wonder of the world
Setting up a pharmaceuticals trust in the mid-1990s taught Max King the power of compounding
Investors are regularly reminded that compound returns are the eighth wonder of the world. But you don’t understand quite what that means until you are on the receiving end of them. I only fully appreciated the truth of the saying after investing in Finsbury Worldwide Pharmaceutical Trust, now the Worldwide Healthcare Trust, from its inception in early 1995.
I was the lead fund manager at Finsbury Asset Management, which I had joined in 1987 with the objective of turning four small investment trusts into successful UK-focused funds suitable for retail investors.
By 1994, that process was well underway and our thoughts turned to launching a new trust. It is easy to forget how domestically-orientated most investors, even professional ones, were in those days, though with the FTSE 100 index producing compound capital returns, on trend, of 10% per annum, investing internationally wasn’t the necessity it now is.
International funds were divided on geographic lines, which meant there was little comparison between companies in the same sector operating in the same global marketplace but listed on different national exchanges.
The sector that was most obviously crying out for an international approach was pharmaceuticals. The FTSE 100 contained four pharma stocks – Glaxo, SmithKlineBeecham, Wellcome and Zeneca – and there were also several smaller firms.
However, the largest stock, Glaxo, only ranked number five in the world, even though it had grown its sales at a compound rate of 20% for ten years. Given the long-term growth potential of the healthcare sector, as obvious then as it is now, there was a compelling case for a global fund able to cross national boundaries but with access to specialist scientific knowledge.
Fortunately, my colleagues, William Salomon and Tony Townsend, knew just where to go. Mehta and Isaly was a New York-based brokerage firm specialising in pharmaceuticals. It covered over 300 companies, had successfully managed a US fund for five years and was enthusiastic about a sector that, following the failure of the Clinton healthcare reforms, was valued at a historically low level. It agreed to partner with us in the launch of a new investment trust.
The launch was not a success, raising just £14m. About £10m of that came, as promised in advance, from Equitable Life, while a couple of other investors put up seven figure amounts. Among the smaller investors was our internal pension fund, including 10,000 shares at £1 each from me.
Despite their misgivings, the Stock Exchange permitted the listing to proceed. Since Sam Isaly was not authorised in the UK, he could only be an investment adviser. So, for the first two years, I was the official fund manager, a task that involved placing the orders which he “advised”. He was rather put out when I asked the reasons for his instructions but understood when I explained that I might be accountable for them and wanted to be able to field questions from investors without bothering him.
The trust returned around 40% in the first year, on the back of which we managed to raise another £40m. Many investors saw a London-listed trust with an overwhelmingly international portfolio as a way to cheat on the UK constraint they were under. Since then, the number of shares in issue has grown moderately but the share price multiplied again and again.
Finsbury Asset Management was sold and I left, but rather than sell or cut my holding, I added to it. The most I paid was £5. Mehta and Isaly broke up; Isaly formed OrbiMed, a healthcare investment group, and it became the formal manager. The remit was broadened and the trust renamed. A few years ago, Isaly stepped back from OrbiMed but the trust has continued to prosper. Today’s share price close to £35 represents a compound return, excluding dividends, of 15% per annum.
What are the lessons from this story? Small beginnings don’t preclude big successes. Trusts needn’t be prolific share issuers to grow big. Long-term continuity of management and style is vital. And if you find an area offering secure long-term growth with expert management, stick to it like glue. As Warren Buffett advised, “lethargy bordering on sloth should remain the cornerstone of an investment style”.