It costs a fair amount of money to administer and run the structures underpinning any popular religion.
Thankfully for the Church of England, the people who manage its assets are pretty good at their jobs.
One of the Church’s funds is now up there with the world’s most-admired endowments in terms of its past performance.
There are plenty of lessons to be learned. But one of the most interesting comes out of the Church’s aversion to passive funds…
Why a very long time horizon helps when you’re investing
The Church Commissioners manages £7.9bn on the behalf of the Church of England. It’s a perpetual endowment – it exists to generate money to help pay the Church’s costs, including vicars’ wages and pensions.
It’s got quite an interesting history. It can traces its roots back to a scheme created by Queen Anne in 1704 to subsidise the earnings of clergy in poorer areas, and to another fund set up in the 1800s to help found new parishes created by the Industrial Revolution.
The endowment grabbed a few press inches yesterday because after a decent return last year (up 17%, well above its benchmark of inflation plus 5%), it has a ten-year record that’s up there with the most famous endowment in the world, that of Yale University. So while you can argue that it benefited from Brexit last year (and it did – its large overseas holdings rocketed in sterling terms), it’s not just a fluke.
Anyway, I’ve written more about what you can learn from the fund’s investment techniques in MoneyWeek this week (you can sign up for your first 12 issues here). But one quote in particular caught my eye, and I wanted to discuss its implications here this morning.
The Church Commissioners does all the things you’d expect a half-decent endowment to do. It is well diversified, it owns a variety of relatively exotic and illiquid assets (timber, property, private equity and the like) because its time horizon allows it to do so, and it aims to have a contrarian slant (less need to worry about short-term returns means it can afford to be bolder too).
As John Plender notes in the FT, one of its contrarian bets right now is to avoid passive investing. According to Plender, the endowment’s investment director, Tom Joy, reckons that “the performance of active versus passive funds is highly cyclical and that the fund management business is too obsessed with the recent past”. With active managers underperforming at the highest rate on record, this is the last moment, he thinks, to be shifting from active to passive.
This is an interesting take. It’s hard to analyse on its face value –there’s no simple benchmark to compare the endowment to in order to gauge how “active” each bit of its portfolio really is.
After all, as you’d expect for a big fund like this, its top 20 equity holdings are all huge companies that you might find in any global tracker fund with an “ethical” overlay (so you’ll have BP, Google, Samsung and Glaxo, but not Imperial Tobacco).
But they only account for 3.2% of its assets. And it also has unique assets such as Canterbury Estate, for example, or the London Lancaster Hotel. So you’re not going to easily go out there and find a Church of England ETF, for example (though if its performance keeps going well, I’m sure someone will approximate one).
When could active outperform passive?
But what about the broader point? That active management is at a cyclical low versus passive management? I’ve seen people try to make this argument before – it generally goes along the lines that passive funds do OK when the stockmarket is rising, but then active does better when it’s falling.
My response to that is: even if that was true (which is debatable), if you have the mystical power to predict a falling market and so time your shift from passive to active accordingly, then you’d be better off just moving to cash.
However, I do have some instinctive sympathy with Joy’s view. The problem with human beings is that we love good ideas so much, that when we find one that works, we stretch it to breaking point. George Soros understands this, and it also underpins Hyman Minsky’s view of the economy, that “stability breeds instability”.
Passive investing and everything that goes with it is a great idea. So we are bound to stretch it to the point where it snaps. We will do too much of it, or we will apply it to areas that it shouldn’t be applied to, or we will find some other way to mess it up. If you wanted to stick with the biblical theme, I suppose you could describe it as the original sin of investment.
So how could this manifest itself? Arguably the problem is that the debate about “active versus passive” is too broad.
We’re really talking about whether it’s better to stick your money in an index tracker (a fund that just tracks a big index like the S&P 500 or the FTSE All-Share) or to find a fund manager who is doing something different to the index.
The biggest benefit of an index tracker is that it’s cheap. The risk is that what it’s investing in (the underlying market) is overpriced, and that it is now simply benefiting from momentum.
The big benefit of the active fund is that it should have the ability to find individual stocks that are cheap (or at least represent good value, not always the same thing) and buy them instead of the index. The risk is that you end up paying the manager such a big fee that you’d have been better off with a tracker anyway.
To my mind, there are two real solutions here. Number one: if you want to stick with passive, then avoid expensive markets. For example, don’t buy an S&P 500 tracker – opt for something Japan-related instead.
Number two: if you want to go active, you need to do your research. Find a manager who is doing something different to the wider market. Find someone who has a clear strategy and sticks to it. Get a feel for how their strategy has performed during different economic periods – don’t focus just on the past five years, try to get a view of what happens when things go pear-shaped.
If you’re wondering where to start, I’d look to the investment trust sector first. History shows that investment trusts have a far better general record of outperformance than other types of fund. I’ve written about this widely elsewhere on moneyweek.com, but I’ll be revisiting the topic in Money Morning again soon.