Download 24 May 2007 - The Church of England

Quarterly update from the Church Commissioners: January to March
2007
The Church Commissioners manage assets worth over £5.3 billion on behalf of the Church
of England.
They aim for the best long term return from a diverse investment portfolio, to meet their
pension commitments and to provide the maximum sustainable funding for other purposes.
These include support for the work of bishops and cathedrals and for parish ministry.
Their assets include stock market investments and commercial, residential and rural
property. For details of the Commissioners’ holdings and performance in 2006, see their
annual report at http://www.cofe.anglican.org/about/churchcommissioners/annualreport.
Highlights
 The UK stock market recovered following a sharp dip in February and
achieved a return of 2.9% in the first quarter, marking a third successive quarter
of positive returns.
 The average initial yield on commercial property at the end of March had
fallen to 4.6%, the lowest since 1985 when the relevant performance benchmark
began.
Fund performance in the first quarter
The total return from the FTSE All-Share index was 2.9%, a positive return for the third
quarter running. Our UK equities holdings returned a lower 2.3%. Most (0.4%) of the
underperformance was down to the impact of ethical exclusions. Basic materials and
consumer service stocks did well, the latter boosted by mergers and acquisitions.
Our investments in global stocks and shares produced a 2.7% return, ahead of the 2.3%
benchmark index. Equity markets have strengthened since the end of the quarter but returns
in 2007 are likely to be moderate compared with last year’s. In the quarter our managers
reduced holdings in European stocks in favour of more investment in Japanese stocks.
Commercial property stayed in demand. The initial yield has fallen to a record low of
4.6%. A lower yield results in a higher capital value and many commentators now believe
that UK commercial property is currently fully valued. Over the past twelve months
reducing yields have driven returns, but improving rents are likely to drive returns in 2007.
Rural property land values have gone up by 9% in the past year. Overseas and ‘lifestyle’
(ie non-farming) buyers are competing with greater activity among farmers to add to the
already strong demand for the limited supply of land. The quarter’s six rents reviews
showed an average decrease of 1.8%.
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House prices in central London rose by 6.8% in the quarter and 20.9% in the past year.
London rents were up by 4.7% and 13.8% over those periods.
Transactions
At the end of January we sold for £134.5 million most of the financial interest in our loans
to the Pensions Board for shared-ownership clergy retirement housing to Grainger Trust
(see http://www.cofe.anglican.org/news/pr1107.html). This increases our immediate cash
and bond holdings to around £300 million, well above the agreed liquidity reserve (£125
million). Of this sum, we will seek to invest in readily realizable assets any cash that we
have not allocated for current investment or spending plans.
In the quarter we invested a further £25 million in our UK equities index tracking mandate
and raised £5.9 million and £5.5 million respectively from residential and rural property.
Our main commercial property sale was a London West End office (£2.35 million). We
received a net £6 million from private equity funds following some profitable sales of
investments made by the funds.
Our UK and global fund managers, who vote on our behalf on company resolutions within
agreed guidelines, voted in line with management in 95% of UK cases in the quarter,
opposing in 3% and abstaining in 2% of cases. Voting on overseas company resolutions
went with management in 92% of cases, with 7% opposition and 1% abstentions.
Future plans
Our three-yearly independent in-depth actuarial review estimated that at 31 December
2006, our clergy pension liabilities stood at £1,741 million, representing 33.0% of the fund.
Our actuaries advised that the maximum we should distribute for other purposes in 20082010 is £243.8 million - an above-earnings increase compared with the previous triennium.
This means our aim of sustaining non-pensions spending in real terms is on track.
As noted in our latest annual report, depending on whether proposed changes to clergy
pension terms that are currently out to consultation with scheme members come into effect,
a further £18.5 million could be available from us in 2008-2010.
We have accepted the recommendation of a policy review sub-group that we should refine
the Commissioners’ ethical investment policy to place more emphasis on positive criteria
and less on the exclusion of whole sectors of the market, with the adoption of a more
company-specific approach to exclusion. We will consult other church bodies and think
more about how we can best achieve this.
Andreas Whittam Smith
First Church Estates Commissioner
24 May 2007
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