Poor performance across all markets during 2018, particularly the last quarter, meant the £2.4bn (€2.6bn) Church of England Pensions Board (CEPB) slumped to a 2.6% investment loss for the year.
The loss was published in the board’s annual report this morning, and compared with a 9.4% gain in 2017.
CEPB’s public equities allocation lost 6.9%, and the board – which runs assets on behalf of four church pension schemes – cut its exposure to 65% of its £2bn return-seeking portfolio. The long-term target allocation is 35%.
Within its public equity allocation, the CEPB has also continued to reduce its allocation to UK equities, now 6% of the return-seeking pool.
The fund is split between the return-seeking pool, a £70m liability-matching pool consisting entirely of high-quality corporate bonds, and £340m of UK government bonds.
Over 2018, the return-seeking pool declined by 2.2%. This brought its five-year annualised return to 7.6%, and 7.9% a year for the 15 years to 31 December 2018.
Meanwhile, the board’s liability-matching pool lost 1.6% for 2018, compared with a 4.3% gain in 2017.
Pierre Jameson, CEPB’s chief investment officer, told IPE: “We are reducing UK equities in order to take advantage of the bigger opportunity set in global equities. The FTSE 100 and All Share [indices] are skewed towards commodities, mining and financials, with little exposure to, say, tech companies.”
He added that the decision had been vindicated by the outperformance of the MSCI World index versus the FTSE 100 over the past two years. Over the course of 2018, the MSCI World lost 3% compared with the FTSE 100’s 8.7% fall, while over three years to 29 July 2019 the global benchmark rose by 47.8%, outstripping the FTSE 100’s 29.3% gain.
Church eyes private equity and venture capital
The CEPB’s strongest performing asset classes during 2018 were emerging market sovereign bonds and private debt, which combined made up 8.5% of the return-seeking portfolio. During the year the allocation returned 11.5%.
Property – 11.2% of the portfolio – returned 10.7%, while infrastructure equity (10.1% of the portfolio) returned 7.5%. The latter asset has returned 8.9% a year over the past five years, CEPB reported.
Earlier this year, the fund hired Cambridge Associates to increase its private equity allocation over the long term, aiming to reach 7% of the portfolio.
Jameson said the aim was to benefit from the illiquidity premium while also gaining exposure to assets that could not otherwise be accessed. The allocation would be global and would include an allocation to venture capital, he added.
The CEPB has also appointed HIG Whitehorse to run a second US private debt portfolio alongside existing manager Audax. The investment was first made three years ago and has since returned 7% a year. The long-term allocation will be doubled to 8% of the portfolio.
The fund also planned to change the way it calculated liabilities, and Jameson said the new private debt allocation “suits the way we will calculate liabilities, which will relate more to the yield of the portfolio”.
The CEPB follows an ethical investment policy and is advised by the church’s Ethical Investment Advisory Group. Jameson said that this ethical policy had added 1.3% to the return over 2018.