Church Commissioners' quarterly newsletter to September 2005

The Church Commissioners manage stock market and property assets worth around £4.2 billion (at the end of 2004) to provide support for the Church of England’s work in parishes, the ministry of bishops and cathedrals, and the pensions of clergy. This newsletter gives an update on the fund’s performance and asset management over the third quarter of 2005.

For more information see http://www.cofe.anglican.org/about/churchcommissioners

Highlights

Equity markets performed well in the third quarter. The Commissioners’ UK and global portfolios returned 7.1 per cent and 9.5 per cent respectively.

Demand for commercial property remained strong across all sectors.

The Commissioners are preparing further Octavia Hill housing estates for sale.

Returns

UK and global equities make up over half the Commissioners’ fund. These are on course to show a good year, with returns of 15.6% and 16.3% respectively in the first nine months. The quarterly figures were 7.1% and 9.5%. The Commissioners’ UK equities holdings lagged the quarter’s benchmark index but their global equities did better, with Japanese and Asian holdings performing particularly strongly.

Property makes up nearly one third of the fund. Investor demand drove capital values in the commercial sector; rents rose more modestly. Retail produced the quarter’s best returns while industrials are the best-performing commercial sector for the year to date.

Farmland prices have risen by 14% over the past twelve months despite a mid-year fall from the record high at the end of 2004. Uncertainty over CAP reform and single market payments is waning and more land is coming on to the market. The last quarter’s farm rent reviews produced three increases and one decrease; three were unchanged.

Central London house prices rose by 0.2% in the quarter. Rents were slightly up and have risen by 3.5% in the last twelve months.

Transactions

In 2005 and beyond the Commissioners aim to widen their global equities holdings, reshape their commercial property holdings with a view to longer-term prospects, and cut down their weighting in residential property.

They have allocated £25 million from October to their new European smaller companies equities mandate and have appointed Montanaro to manage it. They also carried out a three-yearly review of one of the global equities managers.

On the property front, the Commissioners bought a retail park in Walsall, exchanged an office property in London’s West End for a new holding in Leamington Spa, and sold the Randalls research park at Leatherhead in Surrey. Backed by assessments of demand, cost and returns, they will create three new units on 3.8 acres of land next to their existing industrial estate at Redditch – a £3 million development offering active management opportunities.

Following the sale of some of the ‘Octavia Hill’ housing estates in London to the Genesis Housing Association/Grainger Trust partnership in June (reported last quarter), they are preparing the remaining estates at Vauxhall, Waterloo, Pimlico and Walworth for sale. They aim for completion in 2006.  A small block of flats held over from the June sale to allow tenants their right of first refusal was also sold.

The Commissioners have reviewed the terms of the clergy retirement housing scheme, for which they lend capital to the Pensions Board on an investment basis, and believe these should stay unchanged.

The Commissioners’ purchases of commercial property, net of sales, in the quarter totalled £17 million. They also raised a net £7.2 million from residential and £2.1 million from rural property, and received £4.1 million in housing loan repayments.

Corporate governance

The Commissioners’ UK and global equities fund managers vote on company resolutions on their behalf. During the quarter, UK managers voted in favour of management in 97% of cases, opposed in 1% and abstained in 2%. Global managers voted in favour in 94% and against in 6% of cases. The Commissioners’ views were sought on UK companies’ executive pay proposals: they abstained in two cases and voted against in the other.

The church’s Ethical Investment Advisory Group considered construction company Caterpillar in relation to its earlier sales of equipment to Israel. The Commissioners accepted the group’s advice that there were no current grounds for disinvestment.

The Commissioners made plans to buy a £2 million stake in Impax Environmental Markets Plc, an alternative energy investment trust. They would like to invest more in this area if they can find sufficiently attractive opportunities.

Andreas Whittam Smith

First Church Estates Commissioner

23 November 2005

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