Church Commissioners: What would Jesus invest in?

published 26 May 2017

In 1704, Queen Anne set up Queen Anne's Bounty a scheme to supplement the income of poor Church of England clergy, and allow them to focus more on tending their parishes rather than making a living. The funds, raised from what were once papal taxes before Henry VIII commandeered them, were to be invested in land, and the income distributed to poorer vicars. More than 300 years later, the scheme's descendant the Church Commissioners manages £7.9bn for the Church, and uses the money generated to fund roughly 15% of its costs each year.

Beyond historical interest, why should you care? Because it also has a very solid investment record. The endowment made 17.1% last year, helped partly by exposure to non-sterling assets (which soared in sterling terms after the Brexit vote). You can argue over how good that is (the MSCI World Index made more than 25% in sterling), but in the long run, it's harder to debate. Over 30 years, the fund has returned an average 9.6% a year, beating its benchmark of "inflation plus 5%". And in the last decade, it has returned 8.3% a year versus 8.1% for its much-admired peer, Yale's endowment.

What's the secret? Firstly, asset allocation matters. As the Financial Times' John Plender notes, the endowment struggled in the 1980s and early 1990s because more than two-thirds of its portfolio was in property. The fund is now far more diversified. It still owns property, but also invests in everything from timber to private equity to global stockmarkets.

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Secondly, exploit your investment time horizon. Your time horizon won't come close to that of the endowment's which is virtually infinite but if you are saving for retirement a few decades hence, say, you should take advantage of that. The longer you can leave your money alone, the longer it has to compound, and the "riskier" the assets you can buy (the Church endowment owns little in the way of "low-risk" bonds, for example). Your biggest risk is permanent loss of capital (an investment going bust or defrauding you), not the odd sleepless night so worry less about volatility (day-to-day ups and downs) and liquidity and focus on long-term returns.

Finally, if you invest in active funds (which the Church does, partly to avoid unethical sectors such as tobacco, and partly because investment director Tom Joy believes the hype around "passive" investing means active managers are due their day in the sun), then use small, specialist funds, not big expensive brands. Most of the Church's external managers are "boutique firms, not household names", notes Plender. And they try to "avoid managers that have marketing departments".

I wish I knew what liquidity was, but I'm too embarrassed to ask

Put simply, liquidity refers to how easy it is to buy or sell an asset without moving the price against you. For example, property both residential and commercial is an illiquid asset. It takes a long time to buy or sell, trading costs (from stamp duty to surveys) are high, you can never be quite sure of the price you'll get (or pay) until the deal has closed, and if you want to sell in a hurry, you'll have to knock your price down well below the "market value".

On the other hand, shares in big, listed companies ("blue chips") on the FTSE 100 are very liquid. They are all "fungible" ie, one share is the same as another, whereas each property is unique so millions can change hands every day online. You can get a price almost instantly, and you can almost always find a willing buyer or seller, even in turbulent financial conditions.

The level of liquidity in a market can vary greatly it's wise to assume it will dry up at the worst possible times. During periods of turmoil, it may evaporate altogether. For example, following the EU referendum in the UK last June, holders of many commercial property funds found they were unable to get their money out because of the sudden uncertainty introduced into the market for the underlying properties.

Stocks in smaller companies can also be illiquid when the market is volatile, the "spread" (the gap between the price at which you can sell and the price at which you can buy) might widen sharply, making it more expensive to trade. Indeed, in the very worst panics, only "safe haven" government bonds, such as US Treasuries and UK gilts, may remain as liquid as they usually are.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.