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Church Commissioners' quarterly newsletter to 31 December 2006

The Church Commissioners manage assets worth some £5 billion on behalf of the Church of England.

They aim for the best possible 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 supporting parish ministry and the work of bishops and cathedrals.

The assets include stock market investments and commercial, residential and rural property. For more, see http://www.cofe.anglican.org/about/churchcommissioners

Highlights

  • Equities markets performed well in the fourth quarter, rounding off the fourth successive year of strong positive returns.
  • Keen demand from investors ensured good returns from commercial property in the quarter.

Fund performance

Quarter four returns from our UK and global equities holdings were respectively 6.4% and 4.6%, slightly above the benchmarks. Falling commodity prices reduced returns from UK oil, gas and mining stocks in the quarter, but utilities, telecommunications, and travel and leisure holdings did well. A stronger pound lowered overseas returns for UK-based investors.

Commercial property stayed in demand with strong returns in the quarter. Driven by high rental growth, office sector performance outstripped industrials and retail by more than in the previous quarter.

The quarter’s six rural property rent reviews showed a 0.9% increase compared with an average of 0.5% for the year, during which farmland values have risen strongly by some 9%.

Central London residential property prices rose by 4.6% and are 16.2% higher than a year ago. Central London rents were up by 4.0% in the quarter.

Transactions during the quarter

We invested a further £50 million in overseas equities in the fourth quarter, split between fund managers Fidelity and Axa Rosenberg, and £16 million in emerging market equities.

A net £15 million went into commercial property, including investments of £15.8 million in the ING Nordic property fund and £7.6 million in the Unite Student Housing Fund, and sales of a London West End office and a factory site in Ecclesfield, Yorkshire for £5.2 million and £3.4 million respectively. 

We raised £12.8 million and £17.1 million respectively from residential and rural property, including £7.1 million from the sale of land at Frindsbury in Kent for residential development (with a further £6.5 million due later this year). We received net loan repayments totalling £5 million.

Other business

Our UK and global fund managers, who vote on company resolutions within agreed guidelines, voted in line with management in 95% of UK cases in the quarter, opposed in 2% and abstained in 3%. Voting on overseas company resolutions went with management in 92% of cases and against in 8%.

At its meeting in November, the Assets Committee met with two south London MPs to discuss their concerns over the recent Octavia Hill housing estate sale and the consultation process.

On 31 January we concluded the sale of a financial interest in some of our loans granted to the Pensions Board for clergy retirement housing – see http://cofe.anglican.org/news/pr1107.html for details. The ownership of the properties and the terms of the loans taken out with the Pensions Board by residents are unaffected by the sale to Grainger Trust. The transaction significantly reduces our over-exposure to the UK housing market, which at one point represented 22% of our total assets but is now around half that.

Plans for 2007

We have set a new liquidity reserve upper limit of £125 million for bonds and cash, approximately 2.5% of our total assets, to avoid the opportunity cost of keeping a higher cash sum for long periods. We plan to move any cash over this reserve which is not required into equities or their equivalents.

We will explore new options for investing in equities. Possibilities include investing up to £100 million in a specialist flexible allocation mandate, where the fund manager is free to invest in a wide range of assets as market opportunities arise, and further allocations overseas. Further commitments to private equity funds are planned.

We will commit up to £50 million of new money, in addition to using sale proceeds from our commercial holdings, to specialist property investments in and outside the UK where there are some promising opportunities. We plan to realise income of £25 million from rural property and £20 million from the Hyde Park estate in 2007 from lease renewals and targeted sales.

 

Andreas Whittam Smith

First Church Estates Commissioner

 

23 February 2007