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Quarterly update from the Commissioners to June 2007

 

The Church Commissioners manage assets worth over £5.3 billion on behalf of the Church of England.

They aim for the best long term return from a diverse investment portfolio, to meet their pension commitments and to provide the maximum sustainable funding for other purposes. These include support for the work of bishops and cathedrals and for parish ministry.

Their assets include stock market investments and commercial, residential and rural property. For details of the Commissioners’  holdings and performance in 2006, see their annual report

 

Highlights

  • The Commissioners’ UK and global equities continued to advance in the second quarter, with returns of 4.3% and 5.3% respectively.
  • Because their fund has almost no exposure to credit markets, it has weathered recent stock market turbulence and continued to match performance benchmarks.
  • During the quarter the Commissioners agreed to set up an active currency management programme.
  • They have bought a stake in two property funds comprising Manhattan residential (below) and pan-Asian real estate.

Fund performance

Equities – company stocks and shares - make up more than 60% of the Commissioners’ fund. Our UK equities returned 4.3% in the second quarter, slightly behind the 4.5% benchmark. The ethical policy had a marginally positive impact because of the relative weakness of gambling and armament related stocks, in which we do not invest. Mining stocks did well, benefiting from buoyant commodities prices, as did the telecoms sector.

Global equities produced returns of 5.3%, matching the FTSE All World index. Our fund managers’ good stock selection in the strongly-performing energy, technology and telecoms sectors helped to boost performance. Our exposure to European and North American holdings increased in the quarter.

Since the quarter end, stock market volatility has increased sharply and equities in general have fallen back, mainly because of a major (and arguably overdue) correction in international credit markets. The Commissioners have virtually no direct investment exposure to credit markets and our equities portfolios have performed similarly to their benchmarks during the recent stock market turbulence, which, at the time of writing, has brought major stock markets back to slightly lower levels than they were trading at in the New Year.

The UK commercial property market produced a return of 2.1% in the second quarter (12.4% for the year to 30 June). Rents increased by 3.9% and are likely to drive returns in 2007. Offices were the top-performing commercial sector. The Commissioners’ own performance was boosted by strong performance from their London offices, in particular Kingsway, WC2 which has seen capital growth of 14.6% over the half year to June.

Prime central London house prices rose by 4.9% in the quarter and 22.6% over the past year, while London residential rents rose by 2.5% and 15.0% respectively.

Turning to rural property,UK farmland values increased by 11.6% in the first half of 2007 and by 23.0% over the last 12 months. Limited supply and high demand from investors are producing a strong market in 2007.

 

Fund strategy

Our exposure to assets priced in foreign currencies has grown in importance in recent years and now exceeds over 20% of the total fund. We have set up an active currency management programme, starting in July, to provide some protection for their sterling value against a decline in those currencies’ value.

We invested a further £25 million in our UK equities index-tracking fund early in the quarter. Commitments totalling £15 million were made to new private equity funds.

We reduced our urban property holdings by a net £23 million during the second quarter of 2007. We plan to maintain our overall real estate exposure but are likely to be net sellers of UK commercial property and net investors overseas.

In line with that strategy, we have added two indirect real estate investments to our global portfolio: an initial $70.9 million stake in the Peter Cooper Village Stuyvesant Town Limited Partnership in New York and a $75 million commitment to the MGP Asia III fund. Given that UK real estate is currently fully priced, we will continue to evaluate overseas real estate funds with a view to increasing our pan-Asian, world city and overseas residential exposure.

 

Transactions and voting

Other commercial property transactions in the quarter include the sale of offices at Verulam Point, St Albans for £17.9 million, Old Jewry, London EC2 (£10.1 million) and the purchase of 17-35 Kendal Street, London W2 for £8.5 million. The largest farm sales were at Great Easton, Leicestershire (with vacant possession) for £5.2 million and at Lusby, Lincolnshire for £2.1 million.

Our UK and global fund managers, who vote on our behalf on company resolutions within agreed guidelines, voted in line with management in 94% of UK cases in the quarter, opposing in 3% and abstaining in 3% of cases.  Voting on overseas company resolutions went with management in 92% of cases, with 7% opposition and 1% abstentions.

 

Andreas Whittam Smith

First Church Estates Commissioner

20 August 2007