How to invest like ... the Church of England's money men

A recurring theme among experts is that investors should take a long-term view. Yet few can match the centuries-old record of the Church of England’s investment arm.

The church’s £7bn fund, which provides about 15pc of its income (the rest comes from worshippers), has been run since 1948 by the Church Commissioners. However, the two bodies that merged to form the commissioners, Queen Anne’s Bounty and the Ecclesiastical Commissioners, go back much further – to 1704 and 1836 respectively.

In those early days, despite the fact that a fledgling stock exchange already existed in London, the church’s assets consisted almost entirely of property. Although the two bodies also later invested in government bonds – the Ecclesiastical Commissioners’ reports to Parliament of 1845 and 1858 say that “some income was generated from exchequer bills and government securities” – it was not until the Forties that the commissioners began to invest seriously in the stock market.

Nowadays they run a diversified portfolio of shares, bonds, property, cash and alternative assets such as private holdings in unquoted firms.

This may sound like the kind of multi-asset approach followed by dozens of modern investment houses. But there are still aspects of the commissioners’ strategy that reflect the practices of their predecessors over the past three centuries.

Nowhere is this more apparent than in the property holdings. The earliest real-estate holdings of the two bodies were estates that had belonged to individual bishops and cathedrals since ancient times. This property included agricultural land and residential buildings that could be let to farmers and tenants, generating the income the church needed to pay clergymen and meet other expenses.

Some of these ancient holdings are still in the commissioners’ possession. One example is the Hyde Park estate in west London, which was originally farmland in the ownership of the Bishop of London and transferred to the Ecclesiastical Commissioners in the mid-19th Century. The estate began to be built on in the same century and developments to enhance its value are still continuing.

“Nowadays the estate consists of prime central London residential property and high-end shops and restaurants,” said Edward Mason, the Church’s head of responsible investment. “We use very active estate management to drive additional value.”

For example, the fund is now looking at how it can refurbish several tower blocks that it built on the estate in the Sixties. Although the commissioners have been carrying out a “gradual divestment of property and land”, Mr Mason said 10pc of the portfolio remained in rural land, which he described as “very unusual” for a modern investment fund. The commissioners are also active in timber. “We are the largest private owner of forestry in Britain and supply 5pc of its timber needs,” said Mr Mason.

In the 19th century the church also had large interests in coal mining, with “royalties, rents etc deriving from mining” of £33,000 in 1861 rising to £486,000 in 1914 before starting to decline slowly over the next two decades. In many years during the late 19th and early 20th centuries, mining income jostled with rents from other property as the largest contributor to the church’s bank balance, according to Temporal Pillars: Queen Anne’s Bounty, the Ecclesiastical Commissioners, and the Church of England by Geoffrey Best.

Not all of the church’s property investments have gone smoothly. In July 1992 a Financial Times journalist was able to show, after careful scrutiny of the commissioners’ annual reports and accounts, that they had sustained huge losses, estimated at about £500m, in their property portfolio as a result of mismanaged speculation. But by 1996 the fund value exceeded its previous peak at the end of 1989.

Although Queen Anne’s Bounty had dabbled in shares from its earliest days – it even invested in the South Sea Company, which crashed in 1720, destroying the fortunes of Sir Isaac Newton, among others – it was only with the unification of the bounty and the Ecclesiastical Commissioners in 1948 that a culture of investing in the stock market began.

For example, the fund’s 1954 report refers to purchases of bank shares, insurance shares and new issues of industrial debentures – a type of unsecured bond – as well as “shops of reasonable size in first-class shopping positions either in London or the provinces”.

In the early days only British shares were bought, but managers gradually diversified into overseas equities, which now account for the majority of the stock-market exposure.

Initially stock selection was carried out in house – although help was on hand from high places, as this extract from the report for 1952-53 shows: “In view of ... the magnitude of the commissioners’ operations the Archbishop of Canterbury was asked by the committee to seek the help of the chancellor of the Exchequer and the governor of the Bank of England in obtaining the assistance of an advisory panel on policy in regard to the commissioners’ stock exchange investments.”

Nowadays the commissioners leave all their stock-market investing to outside specialists. Different firms are chosen for the various “mandates”, such as emerging-market shares, US smaller companies and so on.

The commissioners look for fund managers who share their approach to investing, which involves a long-term perspective, sustainability and a preference for the “value” style of investment. “Our 'value’ style, which doesn’t apply just to shares, means we like to buy cheap and sell selectively when prices are high,” said David White of the commissioners. Often this meant a preference for smaller, “boutique” fund managers.

As an example of how the fund’s long-term perspective led it to behave differently, Mr White returned to the management of the Hyde Park estate. He said the fund would sometimes decline to accept the highest possible rent for some of its retail premises to avoid the streets becoming “full of estate agents”. While this would maximise revenue in the short term, “we look to drive the estate’s long-term value”.

Meanwhile, the fund’s focus on income and relative indifference to short-term price fluctuations can be seen in the reports for 1952-53.

The commissioners suffered a £13.1m loss in their bond investments, partly offset by a £800,000 gain on shares, which they referred to as “capital depreciation” and “appreciation”. But they commented: “The net depreciation ... has in no way affected the commissioners’ income.” Today they follow a “total return” investment approach.

How has the church’s unusual approach to investment performed? The fund has an ambitious target of producing long-term annualised returns of 5pc plus inflation, which it has achieved over the past 30 years.

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