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Investment Considerations
CCLA Investment Management Limited
Richard Coulson 020 7489 6150 [email protected]
Page 1
Trustee Act 2000
Have regard for
• Suitability
• Diversification
• Even Handedness
And
• Consider appropriate advice
• Review periodically
= Good Stewardship
Page 2
Suitability and Risk
What matters
Page 3
The virtuous circle
Mission
Investment
Role
Investment
Returns
Asset
Allocation
Page 4
Investment
Objective
Risk priorities for different elements of your funds
• What are you holding the assets for?
• Working capital
– fluctuation in value
– absolute loss
– liquidity
• Development project
– fluctuation in value
• Resource generation (investment returns)
– return risk
– inflation risk
Use the right tool for the job
Page 5
Bank interest rate versus inflation
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2012
2011
2010
2009
Inflation
2008
2007
2006
2005
2004
2003
2002
Page 6
2001
Based on 3-month LIBOR, RPI. Sources: Bloomberg, ONS..
2000
Interest rates
-4.0%
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
-2.0%
Asset classes
What might you invest in?
What might you expect – good and bad?
Page 7
Why focus on the assets?
• Asset allocation is a key influence on the returns you achieve
– a mis-match of assets to benchmark will make achieving
your objectives much more difficult
• The characteristics of assets are consistent over time
• They tend to react differently to changes in investment
conditions
Page 8
Sources of returns
• Some assets earn returns from loaning cash – e.g. cash
deposits and fixed interest securities
– returns are more predictable, risks are substantially known in
advance
• Others participate in a venture – e.g. equities and commercial
property
– returns and risks are less predictable – but are unlimited
over time
Page 9
What we will look at
• Cash
• Fixed income
• Equities
• Property
Page 10
Cash
Investing in Cash
Choice
Pros
Cons
Bank/Building
Society deposits
Ease of use
Poor returns, not
risk free
Term accounts
Better rates
(sometimes)
Locked in
Deposit Funds
Diversification,
higher returns?
Caveat emptor!
Page 11
Why hold cash?
To meet known obligations in the next few years
Because
• Predictable values
• Easy access
• Low short term risk
But
• Convenience and certainty come at a price
• Income varies but does not grow
• Exposed to inflation
• Risk is asymmetric
Cash is good for spending
Page 12
Changes in interest expectations
5
Implied Rate 16.04.2014
Implied Rate 31.01.2014
Implied Rate 08.07.2013
4
3
2
1
0
2014
2014
2015
2015
2016
Source: Bloomberg / CCLA as at 16.04.2014, 31.01.2014 and 08.07.2013
Page 13
2016
2017
2017
2018
2018
2019
Fixed Interest
• A loan made for a fixed period with a fixed interest rate
• Issued at ‘par’, redeemed at ‘par’ but in between prices can
and will change
• Issued by government (gilts) and companies ( corporate bonds
– or ‘credit’)
Page 14
Why hold bonds?
To boost income
• Higher income than cash
• Certainty of income
• To match an obligation
To control risk
• Can diversify a portfolio
But
• Inflation risk
• Prices will change during life of bond
• Default risks
Page 15
UK 10 year bond yield (%)
10
9
8
7
6
5
4
3
2
1
0
18/09/1992
Source: Bloomberg (16-09- 2013)
Page 16
18/09/1997
18/09/2002
18/09/2007
18/09/2012
Equities ‘shares’
• A share in the ownership of a company
• Have voting rights (and should use them!)
• Entitled to dividends
• But at the end of the queue if things go wrong
• Long term returns are driven by value
– rising profits, growing dividends
• But sentiment and news flow dominate short term and can and
do cause volatility
Page 17
Why hold equities?
• Rising income over time
• Strong long term returns and no limit to upside
• Participate in growth of overseas economies
– sectors not available in the UK
But
• Will be volatile – twice as volatile as gilts or property
• Need for diversification
Page 18
Property – Why hold property?
• Income – contractual
• Highest yielding of the major asset classes
• Capital growth
– good over time
• Risk control
– strong diversification benefits
But
• High specific risks
• Expensive/illiquid
• Invest via efficient funds
Page 19
Why hold property?
Property investment returns since 1970
%
30
20
10
0
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
-10
-20
-30
Source: CCLA and IPD
Page 20
Income return*
Capital growth*
*Past performance is no guarantee of future returns
2007
2010
2013
Diversification
The only free lunch
Page 21
Diversification – the prudent approach
• Investors seek returns
• By choosing assets e.g.
– equities
– bonds
• And specific investments e.g.
– individual company shares and bonds
• These choices bring risks – but these risks can be reduced by
building diversified portfolios
Page 22
Diversification – thinking about individual investments
Risks at the asset level can only be reduced by increasing the number of
companies you own.
-but they must be selected carefully – not all combinations reduce risk;
Source: The above charts are based on hypothetical data
Page 23
Pooled investment a sensible choice
• Consistent professional management across all assets
• Control of risk
– Diversification
– Risk modelling
• Lower costs
– Commissions
– External fund costs
– Benefits of scale
Page 24
The CBF Church of England Funds
Page 25
About CCLA
• CCLA is a leading manager of charity assets in the UK
• We offer segregated and pooled management to our clients
• We allocate all our resources to the needs of the sector
• We are owned by our clients
Page 26
CBF Investment Fund – investment objective
• Over the course of a business cycle to achieve an average
total return each year of inflation plus 5%.
• Within this to maintain the true value of income after inflation.
• To limit volatility to 75% or less of that of the UK equity market.
Page 27
CBF Investment Fund
• A suitable ‘all-in-one’ long-term
fund for most charities
Asset allocation 31.03.2014
Infrastructure, 6.8%
• Designed to help meet growth
and income requirements
• Highly diversified and well
balanced spread of investments
• Focus on delivering attractive,
growing income
• Steady income, current yield
3.94%*
• Fund size £942m (31.03.2014)
Source CCLA
*Based upon mid-market price and annual dividend of 49.72p
All data as at 31.03.2014
Page 28
Cash, 3.1%
Property, 6.4%
Overseas Fixed
Interest, 1.5%
UK Equities, 44.9%
UK Fixed Interest,
1.2%
Overseas Equities,
36.1%
Overseas
equities
%
Europe
12.3
North America
14.2
Latin America
0.7
Japan
4.0
Pac ex Japan
3.0
Other
1.9
36.1
CBF Investment Fund
Total return performance: 12 months to end
March
45
Annual dividend history as at 30 November
41.2%
55
40
35
34.5%
50
45
25
40
18.3%
20
13.7%
15
9.2% 8.7%
10
7.2% 8.1%
4.3% 3.5%
5
35
30
25
20
0
2010
2011
2012
Fund
2013
2009
2014
Comparator
Comparator – Composite: From 01.01.12 UK Equities 45%, O’seas Equities 30%, (50%
Hedged), Property 5%, Bonds 15% & Cash/Other 5% & to 31.12.11 UK Equities 60%, O’seas
Equities 20%, Property 10% & Bonds 10%.
Source: CCLA. Performance shown before management fees and expenses: net returns will
differ after the deduction of fees and charges. Please note that past performance is no
guarantee of future returns. Investments in long term funds can go up and down in value and
you may not get back the amount originally invested.
Page 29
Pence per share
30
Source CCLA
2010
2011
2012
2013
CBF Investment Fund – Long term returns
Fund (%)
Inflation (%)
Difference (%)
Since launch
11.10
5.58
5.52
50 years p.a.
10.78
5.99
4.79
40 years p.a.
11.49
5.98
5.51
30 years p.a.
9.83
3.62
6.21
20 years p.a.
7.33
2.93
4.40
10 years p.a.
7.85
3.27
4.58
Source: CCLA as at 30.11.13
Page 30
CBF Church of England Deposit Fund
•
•
•
•
•
•
•
AAA/V1 money market rating by Fitch Ratings
Focus on safety remains priority
Attractive rate regardless of the amount invested
No minimum balance
Interest paid gross, quarterly
Fund size £653m (30.06.2013)
Deposit Rate as at 31st May 2014 0.50% A.E.R*
* A.E.R. = annual equivalent rate, which illustrates what the annual interest rate would be if the quarterly interest rates were
compounded.
Page 31
CBF Funds approach to Ethical & Responsible Investment
ESG* integration:
Focusing on responsible risk mitigation
Ethical exclusions:
As advised by the EIAG
Stewardship:
Engaging to change corporate practice
Voting at annual general meetings
Positive investments:
Finding mission aligned benefits
Working with the CIG:
Ecumenical church investor collaboration
*Environmental, Social & Governance
Page 32
The certainty of cash...and its cost
Holdings
Market value
Income
Yield
Forecast annual
income
CBF Deposit Fund
£100,000
0.50%
£500
TOTAL PORTFOLIO
£100,000
0.50%
£500
Source CCLA
Page 33
Certainty v Cost
Holdings
CBF Investment Fund
Market value
£25,000
Income
Yield
3.92%
Forecast annual
income
£980
-
CBF Deposit Fund
TOTAL PORTFOLIO
Source CCLA
Page 34
£75,000
0.50%
£375
£100,000
1.35%
£1,355
Certainty v Cost - II
Holdings
CBF Investment Fund
Market value
£50,000
Income
Yield
3.92%
Forecast annual
income
£1960
-
CBF Deposit Fund
TOTAL PORTFOLIO
Source CCLA
Page 35
£50,000
0.50%
£250
£100,000
2.21%
£2,210
Certainty v Cost - III
Holdings
Market value
Income
Yield
Forecast annual
income
CBF Investment Fund
£55,000
3.92%
£2,156
CBF Property Fund
£20,000
6.39%
£1,278
CBF Deposit Fund
£25,000
0.50%
£125
£100,000
3.56%
£3,559
TOTAL PORTFOLIO
Source CCLA
Page 36
Trustee Act 2000
• Suitability -
What does our money do for our Church
• Diversification -
You can’t trust the long-range forecast
• Even-Handedness- Don’t sell the Church’s future
= Good Stewardship
Page 37
Regulatory information and risk warning
We do not represent that this information, including any third party information, is accurate or complete
and it should not be relied upon as such. Opinions expressed herein are subject to change without notice.
The services described are provided by CCLA Investment Management Limited (CCLA), a firm authorised
and regulated by the Financial Conduct Authority. This document is issued for information purposes only
and is not a solicitation to buy or sell any investment. Nothing in the document should be deemed to
constitute the provision of financial, investment or other professional advice.
Past performance is not an indication of future performance. Values of investments, and any income
derived from them, may fall as well as rise and you may not get back the amount you invested. Exchange
rate changes may have an adverse effect on the value, price or income of investments. The levels and
bases of, and relief from, taxation may change. You should obtain tax advice where appropriate before
proceeding with any investment. Investments in higher yielding bonds issued by borrowers with lower
credit ratings may result in a greater risk of default and have a negative impact on income and capital
value. Income payments may constitute a return of capital in whole or in part. Income may be achieved
by foregoing future capital growth. There may be additional risks associated with investment in emerging
and developing markets.
Where reference is made to Funds CCLA is the appointed Manager and these may be Unregulated
Collective Investment Schemes. The Funds may deal infrequently and may limit redemption. Share values
may reflect fluctuations in property and share prices. Fund charges may be applied to capital which may
result in capital erosion.
Any forward-looking statements are based upon our current opinions, expectations and projections. We
undertake no obligation to update or revise these. Actual results could differ materially from those
anticipated.
Page 38
Appendices
Page 39
The CBF Church of England funds – fees and costs
• The cost of running your portfolio of CBF funds depends only on which funds
you hold. We do not make an additional charge for asset allocation advice, or
an overall portfolio charge
• See the table on the next page to show the costs associated with each fund
• The main ongoing cost for each fund is the annual management charge
payable to CCLA
• Each fund also bears smaller costs such as irrecoverable VAT, governance,
transaction costs, and fees paid to any third party managers. The total
expense ratio consists of the annual management charge plus these
operational costs
• The bid-offer spread, under which you pay slightly more to buy a unit than you
receive when you sell one, reflects the actual cost to the fund of buying and
selling units. CCLA does not take any revenue from these transactions
Page 40
The CBF Church of England Funds – fees and costs (cont.)
Annual charge
by CCLA %
Total expense
ratio (latest*) %
Bid/offer
spread from
mid-price %
Investment Fund
0.55
0.68
0.55
Property Fund
0.65
0.76
1.75
Global Equity Income Fund
0.75
0.98
0.55
UK Equity Fund
0.50
0.67
0.50
Fixed Interest Fund
0.22
0.31
0.2
Deposit Fund
0.20
n/a
-
Source: CCLA
* Historical TER based on report and accounts to 31 May 2013.
Page 41
Value today of £100 invested at the end of 1899
Gross income reinvested
equities
gilts
£32,961
cash
£20,294
Source: Barclays Capital Equity Gilt Study 2013
Page 42
£1,837,824
Relative performance of equities since 1899
Over 3 years
Over 5 years
Over 10 years
Outperform cash
77
81
94
Underperform cash
34
28
10
Probability of equity
outperformance
69%
74%
90%
Over 3 years
Over 5 years
Over 10 years
Outperform gilts
82
80
82
Underperform gilts
29
29
22
Probability of equity
outperformance
74%
73%
79%
Source: Barclays Capital Equity Gilt Study 2013
Page 43
UK 10 year bond yield (%)
10
9
8
7
6
5
4
3
2
1
0
18/09/1992
Source: Bloomberg (16-09- 2013)
Page 44
18/09/1997
18/09/2002
18/09/2007
18/09/2012
12 month forward dividend yield and 10 year gilt yield (%)
Source: Factset
Page 45
Market review – 5 year returns to 30 April 2014
+120.0%
+100.0%
+80.0%
+60.0%
+40.0%
+20.0%
+0.0%
-20.0%
30/04/2009
30/04/2010
30/04/2011
30/04/2012
30/04/2013
30/04/2014
UK Equities +98.20%
Global Equities +84.47%
UK Government Bonds +26.89%
Cash +2.09%
Inflation +20.59%
UK Commercial Property +60.52%
Sources: Bloomberg, IPD: FTSE All-Share Total Return Index, FTSE All-World Total Return Index, FTSE UK Govt All-Stocks Total Return Index,
IPD Monthly Total Return Index*, 7 Day LIBID, Retail Price Index* (*lagged a month to give a contemporaneous picture).
Page 46
Senator House, 85 Queen Victoria Street, London EC4V 4ET
www.ccla.co.uk
Page 47