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First Commissioner's update to 30 September 2009

The Commissioners manage a diverse portfolio of assets for the Church of England. These are held in stock market investments and commercial, residential and rural property and were valued at £4.4 billion as at December 2008. The money from them is used to meet the Commissioners’ pension commitments and to provide the maximum sustainable funding for other purposes, including support for the work of bishops and cathedrals and for parish ministry.

Key points

  • The global economic outlook picked up in the third quarter and modest growth is forecast for most major economies next year. 
  • Equities gained in most regions with their highest quarterly return since 1975. The Commissioners’ UK equities return of 23.0% was ahead of the benchmark.
  • Though well below the peak of two years ago, prime central London residential values rose 2.4% in the quarter and are 3.8% higher than the start of the year.

Quarter 3 performance

The rally in UK and global equities continued. The Commissioners’ UK equities holdings, valued at £1 billion at the quarter-end, returned 23.0%, the highest quarterly figure since 1975 and surpassing the quarter’s 22.4% benchmark. Sterling’s weakness against other major currencies helped, and so did the exclusion of some stocks under our ethical investment policy. Company earnings were generally higher than expected, but cost cutting drove most of this.

Our global equities, which make up the largest element of the fund, returned 21.2% compared with the benchmark of 21.7%. These are concentrated mainly in North American and European stocks and their value was just under £1.7bn at the quarter-end.

Alternative securities such as private equity have done well this year and are a useful diversifier for the fund.

The new corporate bonds mandate has been a consistently positive performer. In quarter three it returned 5.5% (benchmark: 5.9%), but has exceeded the benchmark since the mandate began in February.

The quarter three index return for UK commercial property is 3.3%, but the figure for the past year is negative (-19.2%) and values are 43.3% below their July 2007 peak. Prime central London residential prices rose 2.4% in the quarter while rents fell 0.1%. Rural land values are stable and the rent review trend is upwards, supported by strong agricultural commodity prices.

Investment activity in the third quarter

In the quarter the Commissioners moved £150 million from UK equities into a new global equities mandate and raised £5 million from sales of strategic land, £2 million from residential and £1 million from rural land sales.

On the ethical front, the church’s Ethical Investment Advisory Group (EIAG) has looked in depth at London-listed mining company Vedanta Resources plc and its planned bauxite mine in Orissa, India, which has attracted controversy. The EIAG met the company’s chief executive in September and is working with other major City fund managers to urge positive changes in Vedanta's practice through shareholder dialogue. 

In September the Commissioners declared Rose Castle unsuitable for permanent retention as the Carlisle see house, based on long-term costs and the views of the diocese. We will work with locally-interested parties on the house’s future, and will review options for a new see house in due course.

We gained planning consent for a flagship Marks & Spencer department store in Cheshire as well as phase 1 of a mixed-use development at Ashford, Kent with 1,100 homes. We also applied for consent for a 2,000-home development in West Sussex and have sought to manage local concerns about environmental impact, notwithstanding the proposal’s employment and housing opportunities. A planning application for 825 homes at Carlisle should be determined later this year.

Further ahead

There are some signs are that business and consumer confidence are picking up. It is wise not to be over-optimistic, but for most major economies modest growth is forecast next year, led by the US and emerging markets.

The Commissioners’ strategy is to invest mainly in real assets such as equities but we are mindful of risks as well as prospective returns and are seeking to diversify this portfolio further. Our stance on new investment in property is positive but also cautious in the current market, and we are focusing on making sure that our vacancy rate for commercial properties remains low.

 

Andreas Whittam Smith

First Church Estates Commissioner

18 November 2009