This article has been adapted from our sister site across the pond, Fool UK.
Even for nonbelievers, the Church of England is truly a fascinating institution.
The roots of the church can be traced back to the Roman Empire, but the Protestant establishment we know today has its origins in the much-catalogued marital problems of King Henry VIII (1491-1547).
The ultimate long-term investor
Having been around since the 3rd century AD, the Christian church is a pillar of Britain. Indeed, the CofE still plays a vital role in British life, supporting Christian worship, community life, education, and social and pastoral care.
Despite falling church attendance, a million people visit church each Sunday, and millions more attend churches for weddings and funerals. Also, schooling plays a vital role for the church, with 1 million pupils in CofE schools (which make up 1 in 4 primary and 1 in 16 secondary schools).
Of course, operating on a national scale with such a long-established pedigree doesn't come cheap. In fact, the church supports nearly 20,000 ordained ministers and 1,600 armed forces and prison chaplains, plus countless retired clergy.
What's more, the CofE's 16,000 churches and chapels and 43 cathedrals must be maintained, with essential repairs estimated at 925 million pounds in the five years from 2006.
Clearly, defending the faith does not come cheap, which is why the Church of England has to structure its investments on the longest possible timescale. Forget day-trading; for the CofE, investment timescales are measured in generations and centuries.
33 wise men and women
With its eternal demands for capital and cash flow, the church has been forced to become one of the U.K.'s most forward-thinking investors.
Hence, since 1948, the church's historic resources and financial assets have been managed by an asset manager known as the Church Commissioners. These 33 individuals support the Church of England's work across the country, providing 16% of church spending of 1.2 billion pounds in 2009.
As you'd expect, the Church Commissioners aren't a high-spending outfit. In fact, they spent just 1.8 million pounds on corporate governance in 2009, which is a mere 0.9% of the 193 million pounds they contributed to the church's upkeep. If only more public company directors were so modest with their pay demands.
A holy portfolio
At the end of 2009, the CofE's portfolio was worth 4.8 billion pounds, but today should comfortably exceed 5 billion pounds, given the positive returns generated last year. (You can download the 49-page 2009 report here.)
According to the commissioners' 2009 review, their aim is to produce "the best return from [church] assets ... without undue risk and in line with [the church's] ethical investment policy."
They have a long-term target to return at least the RPI (retail prices index of inflation) plus 5%. Of course, being an "eternity investor," the church is very keen on "real" assets, so the bulk of its wealth is invested in company shares and property. Similarly, diversified asset allocation (spreading one's capital around) is at the heart of the church's investment approach.
Property of the parish
At the end of 2009, 1.5 billion pounds -- almost a third (31%) of the church's portfolio -- was invested in property assets. This subportfolio covers a wide range of real estate, spread across various property sectors and geographies for the best possible risk/return profile. Thus, it includes domestic and commercial property, rural and development land, and stakes in global property funds.
The commissioners' primary goal is to maintain and maximize their income from property, for example, by negotiating lease renewals and regears, and by redevelopment and change of use.
Sharing the profits
The commissioners also put their faith in global capitalism and Mr. Market, as more than half of their funds are invested in securities. As you'd expect, U.K. and global company shares dominate, but the church also holds unlisted and private-equity investments, plus fixed-interest bonds.
The church's stock market portfolio is externally managed by a hand-picked group of professional fund managers with differing investment mandates, styles, and risk profiles. While seeking to maximize total returns, all external managers must adhere to the church's strict ethical investment framework.
The Church of England's Ethical Investment Advisory Group forbids investment in companies whose principal business includes weapons, pornography, gambling, alcohol, or tobacco. Also, the church campaigns tirelessly against high-APR home-credit lenders.
Beating Mr. Market
In recent years, the commissioners have adopted a less U.K.-centric approach, scaling down their U.K. shareholdings to pump more into global company shares and private equity. Likewise, despite their worries about deflation, the trustees have rejected a higher weighting in gilts in favor of investing in real assets to produce higher returns in the long run.
With their eyes fixed on such a distant horizon, the Church Commissioners need not worry about the day-to-day rises and falls in asset prices. Without a doubt, this slow-and-steady, ethical approach has reaped dividends for the church.
In the 10 years to 2009, the commissioners' assets grew by an average of 5.1% a year. This is below the commissioners' target of 7.7% (RPI+5%). Even so, it is 2 percentage points higher than the average fund as measured by the WM All Funds universe, which is a decent result.
Within this overall return, property proved to be the better bet, returning 11.2% a year in 2000-09, versus a mere 1.7% for equities. What's more, the commissioners' strategy easily beat inflation, with their portfolio growing at a real (after-inflation) rate of 2.4% a year.
Over the past decade, the commissioners have distributed 310 million pounds more to the church than they would have done had their performance merely matched the industry average. Thus, the "boring old church" triumphs over the millionaire managers of the city and Wall Street!
