The investment arm of the Church of England has warned of “muted earnings” for the medium-term, after sterling’s recovery in 2017 weakened returns for the year to 7.1%.

The return on the Church Commissioners for England’s £8.3bn (€9.4bn) investment portfolio compared to 17.1% for 2016, and undershot its investment target of inflation plus five percentage points (9.1% in 2017).

However, the average annual return over the past 30 years – 9.4% – is still above its target of 8.4%.

Loretta Minghella, first Church estates commissioner, said: “The macro-economic environment is changing and, anticipating muted returns in the future, we will continue to develop our focus on non-traditional asset classes.

“Our perpetual endowment and long-term horizon is well suited to maximising returns from less liquid markets, including venture capital.”

The Commissioners said: “We believe that prospects going forward are more muted than the recent past and we therefore retained our cautious approach, focusing efforts to create long-term value…

“In the absence of a market correction in the near term, we will likely find ourselves in a low-returning environment for some years to come. This will mean that returns are generated principally by income and active asset management.”

Equities lead returns as real assets stall

The fund’s global equities allocation was the strongest performer in 2017, with a return of 18.6%.

In their report, the Commissioners said: “Unlike 2016, where performance was strong across the board, in 2017 most of the fund’s return was driven by our public equities.

“Our active UK smaller companies manager and our global managers performed particularly strongly and outperformed across the board.”

The emerging markets portfolio also delivered strong absolute returns, the Commissioners said. They also hailed a successful year for the fund’s in-house property team, although the combined real assets allocation delivered a relatively subdued 4% over 2017 after several years of strong performance.

However, the recovery in sterling – mainly against the US dollar – was a “headwind” for their dollar-based strategies, the Commissioners said, including multi-asset, private equity and private credit strategies. The latter lost 1.6% during the year.

Fixed income returned 4.8%, as credit markets rallied due to continued economic growth and improvements in corporate earnings – although these too were affected by the rebound in sterling.

The defensive equity portfolio delivered 10% for the year, more than double its return for 2016, while private equity gained 7.2%. Around a quarter of the Commissioners’ private equity allocation – which makes up 4.7% of the overall portfolio – is in venture capital.