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First Commissioner's update to 31 December 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 in rural property. Income from them is used to meet our 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. The fund’s valuation as at the end of 2008 is £4.4 billion. Its audited revaluation for 2009 will be confirmed in the next few weeks. 

Key points

  • Equity markets recovered further in the fourth quarter, if at a slower pace than the rapid gains of quarter 3. The Commissioners’ UK equities returned 4.4% and our global equities returned 4.1%. 
  • Property saw an index return of 10.0% in the quarter, the highest quarterly return since these records began in the early 1980s. This reversed the dip in value in the first half of the year and contributed to a small positive return from property in 2009 overall.
  • Our rural land holdings were the biggest contributor, outperforming residential and commercial property in 2009. 

Quarter 4 performance

Global equity markets performed well in 2009, with the third quarter’s performance contributing strongly. In quarter 4 the Commissioners’ UK equities returned 4.4%, behind the index’s 5.5% because smaller companies did less well than larger ones in the quarter. Our global equities returned 4.1%, ahead of the FTSE All World index’s 3.6%.

UK gilts were weak during the year and are likely to remain so with the prospect of higher short-term interest rates in 2010 and an end to quantitative easing. The potential of investment-grade corporate bonds has lessened and we sold our investments in these at a useful profit in December.

Real estate looks likely to show modest positive capital and income returns for the year overall. Rural property has been a strong contributor thanks to its increasing profitability and its ‘safe haven’ status for investors and once again performed well in the quarter, as did residential. Capital values for prime central London housing rose 3.8% in the quarter reaching a point some 12% below the mid-2007 peak, while rents stayed fairly flat. By contrast, commercial property values fell 5.6% in 2009 and remain almost 40% below their July 2007 peak.

Investment changes in the quarter

As well as the sale of corporate bonds in December, which realised £106 million, we sold £20 million of UK smaller companies holdings following their strong performance in 2009, and raised a net £4 million from real estate sales. We committed £10 million and £9 million respectively to investments in private equity and global property funds.

The quarter saw engagement via the Ethical Investment Advisory Group with Vedanta Resources plc over concerns about the company’s alumina refinery and planned bauxite mine in Orissa, eastern India, and their impact upon local villagers and their environment. The dialogue process produced little result and in February we sold our shares in Vedanta. More information is at http://www.cofe.anglican.org/news/pr2010.html. None of the Church of England’s national investing bodies now holds shares in the company.

Outlook and investment plans for 2010

Reviewing the target ranges for allocation to each type of asset, the Commissioners agreed the range for equities should be slightly reduced to 50%-62% and that for rural property increased to 3%-8%. Global equities now make up a larger share of our equities holdings than UK, reflecting an increasingly globalised marketplace.

In the coming year we envisage that sales from the UK equities index-tracking mandate will be the main source of funding for new investments and expenditure, supplemented by sales from residential property and strategic and let land.

We plan to reshape our global equities holdings into a passively-managed core supplemented by specialist active mandates, as with our UK equities.

We aim to make further investments of up to £100 million in UK urban commercial and residential property, £60 million in private equity funds and £40 million in strategic/rural land. Smaller investment possibilities that we are looking at include emerging and frontier market funds, the latter including the Middle East and sub-Saharan Africa.

 

Andreas Whittam Smith

First Church Estates Commissioner

15 March 2010