The UK Church Commissioners for England, which has assets of €5bn, took two key decisions in the years immediately before the financial crisis began that have proved their worth. The endowment substantially reduced its residential property investments from 22% in 2003 to 11% at the end of 2008. Over 2005-08, the endowment reduced by €440m and €275m respectively its exposure to UK and residential and commercial property, leaving it better placed in the current financial climate than it might otherwise be.

“The measures taken to achieve this objective were controversial,” notes Andreas Whittam Smith, First Church Estates Commissioner. They consisted of selling the Octavia Hill estates in London and the sale of the financial interest in a substantial part of its investments in homes occupied by retired clergy. Separately, the endowment decided to smooth its distributions based on a formula approved by actuaries Hymans Robertson. When the value of the portfolio dropped in 2008, the smoothing policy insured that distributions to beneficiaries would be maintained at previously indicated levels until the end of 2010 when the three-year budget planning period comes to an end.

“The difficult question that confronts us is whether Britain will shortly experience deflation in the sense of a persistent fall in prices of goods and services or, alternatively, must we ready ourselves for the return of a high rate of inflation? Rarely have investors had to contemplate such a wide range of possibilities,” Smith notes in the endowment’s most recent annual report. “If we knew that deflation was likely, which nobody can say with confidence at this time, then significant changes would have to be made to the Commissioner’s portfolio. It would be necessary to switch a substantial portion of our assets into government securities. This switch would be a major change. From the 1950s onwards… we have held the bulk of our funds in equities and property.”

Move to a more global strategy

The endowment has pursued a policy of diversifying away from real estate and UK equity into global equity and alternatives. The portfolio is currently allocated 55% to equities, 16% to urban property, 8% to rural land, 7% to alternatives, 6% to global indirect property, 6% to bonds and cash and 2% to strategic land. Active investment decisions regarding equity were not made during the course of the financial crisis. “We have not divested from equities,” notes Andrew Brown, Secretary of Church Commissioners. “There have been no active changes to our weightings other than the impact of the markets on the portfolio.” While there has been no policy change in regards to asset weightings, there is a clear policy in place to diversify the portfolio geographically. This has resulted in a smaller UK equity allocation, which is passively managed, and a growing actively-managed global equity allocation. The fund placed £150m into a new global equity mandate in the third quarter, notes Brown.

On the equities side, new appointments in 2008 included ING Clarion, Generation Investment Management, Baillie Gifford and Newton. In the alternatives category, new appointments included ING Clarion to run a global REIT portfolio and Ruffer to run a multi-asset class absolute return mandate. Reappointments included Fidelity for global equity, Wardell Armstrong for estates minerals and Smiths Gore for the northern rural portfolio. As part of its diversification, £505m was taken out of UK equities in the spring, £300m of which was allocated to cash and UK treasury bills. Another £300m was invested in global equity mandates and £228m was allocated to expanding the alternative portfolio which includes private equity, absolute return and REITs. The endowment invested, tactically, in a UK investment-grade corporate bond mandate in the fourth quarter of 2008. Exposure to let land, residential and value-linked loan portfolios was reduced, according to the annual report.

In the future, Church plans to continue moving to a more global strategy and diversify further away from equities towards private equity, absolute return and global property provided it finds long-term investment opportunities. These moves are likely to be funded by reducing its passive UK equity holdings and making selective sales of land and urban residential property. Over the past ten years, the fund’s returns have averaged 5.7% per year against the WM benchmark of 3.7%, enabling the Commissioners to distribute £26m per year more than if they had returned the same as the benchmark.

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