(July 29, 2013) — “We have to invest in this world, so where do you draw the line?” says Tom Joy, director of investments for the Church Commissioners for England, over coffee in the shadow of Westminster Abbey. “We don’t invest in pornography, but some of the hotel chains in which we invest offer it to guests, so where does it end?”
It is a question that flummoxes every ethically-aware investor, but few are held up for such public scrutiny as Joy and his team.
It is less than a week since the head of the Church of England, Archbishop of Canterbury Justin Welby, declared war on payday lenders—companies that offer cash at interest rates of thousands of percent—only to discover the church’s endowment and pension fund had invested in one, albeit indirectly.
An investment in Wonga.com was made through a fund of venture capital funds in 2009, Joy explains, and the £5.5 billion church fund did not have control over the investments of the underlying managers.
Joy cannot expand on the matter owing to a review being undertaken by the fund; he is also keen to downplay the furore around what amounts to a tiny fraction of its multi-billion pound holdings—but he concedes the headlines were not surprising.
“We have dedicated a lot of resources to investing ethically,” he says “but we accept we’re an easy target—it’s unfair but there’s not a lot we can do about it.”
That the calamity should happen to one of the most ethically aware institutional investors is ironic.
“Environmental, Social, and Governance (ESG) factors are important and integrated into our approach,” Joy says. “We are signatories of the UN Principles for Responsible Investment and although we don’t demand that our external managers sign up too, they have to demonstrate that they integrate them into their investments.”
All investments overseen by the Church of England are monitored and advised upon by a separate body—The Ethical Investment Advisory Group—which ensures they adhere to a set of principles. The group carries out its own investigations into holdings and flagged its concerns over lenders that charged exorbitant interest rates in this year’s annual report.
Joy says his fund is an active equity investor that takes engagement “increasingly seriously”. It votes on all of its shares, which make up between 40-45% of the portfolio. The fund even monitors the carbon footprints of its investments and those of its external managers.
It is part of a consortium to buy branches of government-rescued Royal Bank of Scotland on the UK high street. “It would mark our first direct private equity co-investment,” says Joy. “We are going through the due diligence at the moment, so I can’t say too much, but we want to make a good investment—and a good bank.”
Away from the Wonga.com sideshow there is an investment model at work that is unlike most others in the sector.
The fund is a hybrid pension/endowment that receives no income from the Church. The fund is the second largest of its type in the UK—after the Wellcome Trust—and is in the top 10 in the global rankings. A third of its assets are earmarked to provide pensions to Church of England staff, and the rest is to support the church’s work in the community.
“The Church costs around £1 billion a year to run,” says Joy. “We contribute more than 15% of that, and £100 million a year goes towards pensions. Even during the financial crisis we have not had to make cuts to this distribution, which is something we are very proud of. Sometimes we have not been able to grow what we give, but as we smooth distribution we were able to keep things stable—something our clients [the Church] value highly.”
The fund targets inflation +5% and has outperformed this target by two percentage points each year for the past two decades, Joy says. The returns might have been more but for the ESG component, which has wiped off around 50 basis points annually. The screen removes swathes of investable holdings—10% of the UK stock market for a start.
So how has it made these returns? “We are genuinely diversified,” says Joy. “Our approach is holistic. We are always thinking of different ways to invest—we don’t use volatility targets and complex risk models. The greatest risk we consider is losing money and we have a very eclectic portfolio.”
There is no set strategic asset allocation for the fund as the team prefers to move dynamically and react to market movements and opportunities. “Our willingness to take risks changes according to markets,” he says.
Around a third of assets are given over to real estate, which includes a 10% stake of the entire portfolio to agricultural land. It is mainly in the UK and has performed very well— as has the recent 2% portfolio allocation to timberland, which made 12% in 2012.
Joy and his 25-strong team do not expect these stellar results every year, but they are happy with the initial investment.
The fund owns substantial residential property, centred on the upmarket districts of central London Hyde Park and Connaught Square (the address of former Prime Minister Tony Blair).
“We manage 40% of assets ourselves, and use the strongest, global, external managers for the rest,” he says. “We don’t have a permanent investment consultant, but use them on a specialist basis for different asset classes.”
The fund is about to make its first foray into infrastructure and has been very active in private credit, which makes up a substantial portion of its 5% allocation to fixed income.
Joy credits the governance structure of the fund as one of its driving factors. His team reports to an investment committee, which reports to the trustee board who he says have the right level of financial experience to ensure this “non-delegated model” does not become stuck in the mud.
And how can the Church of England afford to retain 25 investment professionals with the City of London just a short stroll down the Thames?
“Our packages are competitive, but it’s not just about the wages,” Joy says. “Our staff are accountable and have ownership and recognition for their work. In a competitive market, we have a low turnover rate.”
Joy himself joined in 2009, leaving a position of CIO at South African RMB Asset Management. He had previously spent more than six years at Schroders.
“It was a unique proposition,” he says. “And one that would not have come around again. The role doesn’t involve building a business; there is one client, one fund, and one objective. The scale is large enough that we can do interesting things and we have a good track record.”
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