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Index-linked gilts help Church Pensions Board to record returns

The £2.3bn portfolio of the Church of England Pensions Board (CEPB) returned 21.2% during 2016, the strongest return since performance records began in 2003.

The result was boosted by returns from index-linked gilts, while other strong performers were the allocations to global equities, infrastructure, and emerging market sovereign debt.

The result compares to the board’s overall return in 2015 of 2%.

The CEPB runs four pension schemes, with over 38,000 current or future beneficiaries, including clergy and church workers. It invests ethically, with its policy and practice shaped by the Church’s Ethical Investment Advisory Group (EIAG).

The fund is split into a return-seeking pool, worth £1.8bn at 31 December 2016, a liability-matching pool (£71.6m), and separate holdings in index-linked gilts (£322m).

In May 2016, the broadly-based index-linked gilt portfolio – previously held within the liability-matching pool – was sold, and the proceeds invested separately by each pension scheme.

Pierre Jameson, CIO of the CEPB pension funds, told IPE: “For risk management rather than fund management reasons, we adopted a liability-driven investment overlay in early 2016. The result was that the actively-managed gilt investment in a spread of maturities was taken out of the liability-matching pool and invested separately on behalf of each scheme into a more tactical gilt allocation.”

The Church of England Funded Pension Scheme (CEFPS) – the largest of the four schemes – bought two long-dated index-linked gilts, which returned 40.6% from May to December, making a total return of 45.9% for the year.

Two other schemes enjoyed a 22.5% return from a BlackRock index-linked gilt tracker fund.

Jameson said: “We decided that super-long issues with UK index-linked gilts were a better hedge against inflation and interest rates. It was great timing, because it was then that long-dated gilts started to take off.” 

Meanwhile, during 2016 the return-seeking investment pool delivered 19%, compared with 21.4% for its benchmark.

The CEPB report said: “Markets tend to perform very strongly, as they did in 2016, when riskier stocks do well. For 2016, this was profit-free internet companies, and oil and commodity stocks. Institutional-quality fund managers and their strategies tend to be exposed to less risky stocks.”

Within the return-seeking pool, global equities returned 20.8% compared with the benchmark’s 25.4%, while property returned 11.2% compared with a benchmark return of 2.8%. Infrastructure made 26.1%, US private debt 16.1%, and emerging market sovereign debt 32%.

The CEPB estimated that the weakening of sterling against other major currencies added around 3% over 2016, after taking into account the effect of hedging half its US dollar, euro and yen exposures.

During the year, a new asset allocation was agreed for the return-seeking pool, with a reduced allocation to listed equities, and a removal of the equity portfolio’s UK bias.

The CEPB said: “We increased our exposure to investments that rely more on contractual income and that are less liquid; these include infrastructure and private debt. This move was made to increase the diversity of the assets and reduce the volatility of the pool’s valuation.”

As of end-2016, the return-seeking pool was 55% invested in global developed market equities and 6% in emerging market equities, with a further 10% in small cap equities. There was 11% in property and 5% in infrastructure, 4% in emerging market debt and 3% in private loans.

The liability-matching pool returned 11.2% for 2016, compared with 12.2% for its benchmark. At end-2016, 100% of its assets were held in corporate bonds.

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