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Church Commissioners remain bountiful despite large drop in investment returns

13 May 2018

Church of England

THE Church Commissioners’ annual return on investment last year fell to less than half of their record 17.1 per cent in 2016, and two per cent short of expectations.

Despite this downturn, giving to the Church of England increased by more than £30 million, the Commissioners’ annual report, published on Monday, states.

In it, the Commissioners record a return of 7.1 per cent on its £8.3-billion investment fund for 2017. Its target for the year was 9.1 per cent, roughly half what they managed the previous year, when they grew central church funds by about £900 million (News, 26 May 2017).

The Commissioners’ head of investments, Tom Joy, was unfazed by the downturn. It was not the first time the Commissioners had failed to meet its annual target — to generate a return of inflation plus five per cent — he said on Friday. The financial crisis in 2008 and the Eurozone crisis in 2011 had also been hard years.

“What we deliver in one individual year has almost no impact on what we are able to distribute — and of course the whole purpose of why we are here is to distribute money to support the Church.

“While we would love to deliver the same stable return year in, year out, that is not the way the market works, and there were some very special factors in 2016 which meant that we delivered exceptional return.”

The average annual return over the past 30 years is 9.4 per cent: above its target of 8.4 per cent.

The First Estates Commissioner, Loretta Minghella, explained: “One of the most striking things about 2016 was this issue that arose after the referendum, when the value of sterling fell so significantly.

“That meant that, when we had to value the non-sterling parts of our portfolio at the end of the year for the purpose of calculating total return, all those non-sterling assets were suddenly worth an awful lot more. We knew that was not going to replicate itself in 2017.”

Mr Joy put also put the decline down to its diverse portfolio of assets, which could not always guarantee strong returns across the board, he said. “The real star of 2017 was the stock market, so if you had all your eggs in the stock-market basket you had an amazing year.

“We are more diversified than that, and while our stock market returns did great, better than the market, other asset classes outside of this didn’t deliver as strong returns, particularly real estate, in 2017 as in 2016.

“Also, despite all the uncertainty created by the Brexit referendum, sterling, having fallen dramatically in 2016, staged a recovery in 2017. That was a headwind for our overseas holdings. Against the dollar for example, the sterling went up ten per cent.”

Nonetheless, the report states that Commissioners were still able to contribute 15 per cent of the C of E’s annual running costs, by funding bishops, cathedrals, clergy stipends, and pensions. It was a “usual figure”, Ms Minghella said.

Overall charitable expenditure in 2017 was £226.2 million — down from £315.5 million the previous year. This is attributed in the report to a sharp drop in payments made to clerics under the pre-1998 pensions obligation: down from £206.4 million in 2016 to £81.1 million last year. The Commissioners pick up the bill for any clergy pensions accrued before the end of 1997.

A spokesman said that this reduced figure was an “accounting number”. Actual pension payments were largely unchanged from the previous year (£121.2 million in 2017; £121.8 million in 2016).

Non-pension support for the Church from the Commissioners totalled £144 million last year: an increase of more than £30 million (up from £108.5 million) in 2016. This funding covers support for bishops and cathedrals (£44 million); the dioceses (£37 million); parish reorganisation and closed church buildings (£5.2 million); and mission activities (£56 million).

Mission funding includes the continuation of strategic development in the dioceses: 23 projects in 20 dioceses were awarded grants totally £44 million last year — which will be drawn down over several years — including £2.56 million to work with young people in Birmingham; £950,000 to develop parish churches in Bristol; and £1 million to multiply congregations in Liverpool.

“That additional spending relates to projects which have a longer life,” Ms Minghella said. “We have to count not just what we are backing to be spent in the year in question, but what they are going to involve over the years ahead. It will be commitments that we have made to those projects that accounts mainly for that increase.”

Mr Joy explained: “We can distribute from income or capital gain. If you are meeting it through capital gain you have to make some sales to make some cash, but we are perfectly capable of doing that.”

Some increases in budget or spending were also to do with cash-flow over three-year periods, he said.

The Commissioners also raised £1.54 million from the sale of closed church buildings and land: a slight increase on 2016. In the past ten years, 125 church buildings have been reordered, preserved, demolished, or repurposed. This was compared to 1685 buildings in the four decades up to 2007: an average of about 420 buildings each decade.

On payroll for the Church’s central staff, the report acknowledged that, while the gender pay gap was less than one per cent for three-quarters the staff, there were twice as many men as women in the most senior roles, and three times as many female staff as male in the most junior roles.

This equated to a disparity of 41 per cent in favour of men over women. The report admits: “We know that we have work to do.”

The report also highlights the way that to the Church Commissioners have been flexing their muscles as a leading shareholder. It has co-filed several climate-change resolutions at key oil and gas companies in the past year, including a resolution that received 62 per cent support from shareholders at ExxonMobil, despite strong opposition from the company’s board (News, 9 June 2017).

There were 112 such engagements overall in 2017, including letters and face-to-face meetings to discuss the five “engagement priorities” for ethical investment covering climate change, extractives, alcohol, governance, and corporate tax.

Ms Minghella said: “It is more about the quality and intensity of engagement, rather than the number — though this has also increased.”

The C of E Pensions Board is due to file another climate-change resolution at the Rio Tinto AGM in Australia later this week (News, 4 May).

Despite this activity, the Commissioners failed to match the industry benchmark in a table showing the carbon footprint of public equity holdings in 2017, having outperformed it in the past.

Mr Joy explained that this was caused by stock purchased by one of its third-party fund managers last year. “There is one small £4-million holding, a Hong Kong listed stock, which has a dramatic impact, and pushes us above the benchmark. We are actively engaging with the manager, and would expect that to change over time.”

The report states that its public equities portfolio (about 40 per cent of its total investments) is currently under the benchmark for oil and gas: 4.48 per cent of its portfolio comprises of oil and gas companies, compared to 6.99 per cent of the benchmark.

Mr Joy concluded: “We have obviously had a tremendously strong run of returns from 2009 to the end of 2017 — that has created a position where across the board most asset classes look expensive, and so our expectation is for returns to be more muted on a go-forward basis, and we are well-prepared for that. The outlook is challenging.”

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