Global equities help Church Commissioners to 'stellar' 17.1% return
The investment arm of the Church of England has announced returns of 17.1% on its £7.9bn (€9.2bn) portfolio for 2016, compared with 8.2% for the previous year.
The fund’s investment target is inflation plus five percentage points. The 2016 performance takes the average annual return over the past 30 years to 9.6%, an average 6.0% p.a. above inflation.
The endowment fund helps finance the Church’s activities, besides pensions arising from pre-1998 service.
Andreas Whittam Smith, first Church estates commissioner, described the result as a ”stellar outturn”.
“The only periods with higher returns than the present were the years immediately following the Second World War, and during the 1990s, when the tech bubble pushed stock prices to extremes,” he said.
Global equities, which made up 19.3% of the portfolio at 31 December 2016, were the best performer among the main allocations, with a return of 32.9%, partly reflecting the depreciation of sterling.
In their report, the Church Commissioners said: “Particularly noteworthy was the strong returns of our value managers, which after a challenging period for value investing, outperformed strongly relative to the market to help drive returns at the fund level. Our emerging markets portfolio also helpfully outperformed the benchmark, as too did our US smaller companies portfolio.”
However, equity performance generally was held back by the defensive equity portfolio – 7.7% of the overall assets at end-2016 – which delivered only 4.5% for the year, following “very strong” returns in 2015. Over 2016, part of the portfolio was repositioned from the more competitive US market to Asia and Australia.
During 2016, the equities portfolio was reduced by 17.3%, partly for divestment and also rebalancing.
Private equity, timberland among star performers
Meanwhile, the Commissioners are planning to expand the allocation to private equity – currently 3.9% of the portfolio – significantly over the next few years. Over the long term, this has significantly outperformed quoted equity markets, delivering 26.1% in 2016.
Another alternative asset, timberland, also gave a standout performance, returning 24.3%.
Timberland already makes up 4.8% of the overall portfolio and is invested in Australia, the UK, and the US. The properties include two wind farms in Scotland, and Indian sandalwood plantations in Australia which should start delivering sustainable-produced oil for use in the fragrance and pharmaceutical sectors in the late 2020s.
Credit strategies, forming 6.7% of the Commissioners’ portfolio, include another top performer, private credit strategies, which generated 33.1% over 2016. This allocation was started in 2012 to diversify and improve the return profile of the fixed income portfolio, and the allocation was increased further during the year.
As a whole, the property portfolio, which makes up 23.7% of assets, returned 11.6% for the year, which the Commissioners consider “creditable” in a relatively weak market environment.
The best performer was indirect property, with a 17.0% return on the fund’s 2.7% allocation; US and European investments all performed well, boosted by US dollar and euro gains against the pound.
Residential – 6.1% of the overall portfolio – made 14.1%, while strategic land – 2.4% of the portfolio – returned 13.8%. Within the latter asset class, local authorities continued to identify land holdings as suitable for residential development, with all pre-existing site allocations continuing to be confirmed in local development plans.
The largest property allocation – 8.8% of the overall portfolio – is in rural let land, which returned 9.5%.
In terms of their tenanted farms, the Commissioners have focused on key areas such as water management, horticulture and agricultural infrastructure. A solar farm near Carlisle is now onstream, with another in Newport to be constructed during 2017.
The Commissioner’s relatively recent 0.3% allocation to infrastructure returned 41.3% during 2016. There are two main commitments, an energy credit strategy focused on developed markets, and an “anerobic digestion” investment in the US.
The latter is among the first of what Commissioners calls its “qualifying” impact investments, all made in 2016. It is a US$40m (€40m) commitment to Equilibrium Capital Management’s Waste Water Opportunity Fund. Equilibrium estimate that the investment will prevent the emission of over 500,000 tonnes of carbon dioxide equivalent per year.
The Commissioners continue to invest in line with the ethical policies recommended by the Church of England Ethical Investment Advisory Group and the UN-backed Principles for Responsible Investment. Direct investment excludes companies involved in arms, tobacco, gambling and pornography. There are restrictions on the alcohol sector.