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Quarterly update from the Church Commissioners: July-September 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 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 –over 60% of their fund - and commercial, residential and rural property. For details of their holdings and performance in 2006 see http://www.cofe.anglican.org/about/churchcommissioners/annualreport.

 

Highlights

  • In what was a turbulent third quarter equities produced relatively weak returns. The figures for the year to date remain positive: 4.1% for the Commissioners’ UK equities and 9.8% for their global equities.
  • The Commissioners increased their stake in a Manhattan property fund to £38 million and are looking to increase their exposure to the growing Asian economies.

Fund performance

Our UK equities holdings returned minus 2.5% in the third quarter compared with the FTSE All Share index of minus 1.8%. September saw some recovery from the turmoil in credit markets in July and August. The telecoms and utilities sectors performed strongly, while industrials and consumer goods and services posted weak returns. Ethically excluded  stocks fared well, notably alcohol, arms and tobacco companies. Our UK equities portfolio’s return is a positive 4.1% for the year to date.

The return of 1.5% from our global equities was behind the quarter’s 2.0% benchmark figure. Our return of 9.8% for the year to date matches the benchmark. The technology sector did well, as did basic materials and energy stocks.

Bonds offered a secure investment during this volatile period and our UK gilts holdings produced a 4.1% return in the quarter.

The IPD commercial property index returned minus 1.0% in the quarter despite an increase in income of 1.2%. The total return for the twelve months to September was  7.2%.

Rural and residential property enjoyed positive market returns. The average value of UK farmland has increased by 23% over the last 12 months, thanks to rising commodity prices, growing interest in biofuels and strong demand and competition among farmers, investors and lifestyle buyers for land that remains in short supply.

House values in central London rose by 2.3% in the quarter and by 19.9% over the past 12 months. Rents were up by 3.3% and 15.1% respectively - the highest annual increase for ten years.

Transactions

We moved a further £25 million into our UK equities index-tracking mandate, this being the core, low-risk, element of our UK equities portfolio, during the period of market weakness in August.

Our fund managers’ voting during the quarter on UK company resolutions on our behalf as shareholders resulted in 94% of votes in favour of management’s resolutions, 3% of votes against and 3% abstentions. The voting figures for global company resolutions are: 92% of cases in favour, 7% opposed and 1% abstentions.

We invested £16 million in commercial property including a 10% interest in Gateshead Metrocentre’s Woolworth unit, bought for £1.6 million. As UK commercial property is currently highly priced, our focus for new commercial investment is on buying a stake in global property funds. We invested £2.4 million in the Peter Cooper Village Stuyvesant Town Fund, New York, bringing our total commitment there to £37.9 million.

Looking to gain from the dynamism of the Asian economies, we have invested in property funds in Japan and on a pan-Asian basis. We plan two more investments to complete our Asian portfolio.

Rural property netted £24.3 million including the sale of the Dissington estate to a private individual for £18.5 million. Strategic land sales are on track to realize some £20 million this year as development sites materialize. The six rent reviews this quarter produced an average increase of 0.8% p.a.

We invested a net £3 million in our residential portfolio, including the purchase of a parade of shops at Kendal Street for £8.5 million and sales of £6.35 million on the Hyde Park estate.

Looking ahead

The big factors driving performance in the last ten years have been: the Commissioners’ total return strategy; property sales above valuation in a rising market; the fund’s diverse asset mix; and the good overall performance of the fund managers. 

With a view to maximising total return and avoiding the need to generate extra income at the expense of capital growth, the Commissioners are to seek to renew the legal power to spend capital to help meet their pension liabilities.

Future returns from mainstream asset classes are likely to be lower than the exceptionally strong levels of recent years. Asset allocation will be key to future performance. Our Assets Committee plans to meet with an expert in market and economic trends to inform its thinking.

We have raised our maximum loans to the Pensions Board for the retired clergy housing rental and mortgage scheme to £200,000 (£225,000 in the south east) and £150,000 respectively for the next three-year period.  We look forward to the publication of the current review of clergy retirement housing and hope that a range of alternative long-term ways of helping clergy to house themselves in retirement may be taken forward. 

 

Andreas Whittam Smith

First Church Estates Commissioner

26 November 2007