One might expect the chief executive of the Church of England’s investment manager to be a pious, worthy do-gooder, caring more about the well-being of society than return on investments. Either that or a hard-nosed capitalist, laughing to scorn the gentler concerns of the charities whose money he runs.
James Bevan, chief investment officer of CCLA, the church’s investment manager, fits neither image. Since kicking off his career with post-graduate research into applied economics and asset allocation at Cambridge University, he has been deeply interested in the theory of investment and markets, but is also open to concepts of sustainability and ethics within investment.
First and foremost however, he manages money for clients, a hodge-podge of faith groups, charities and others. Their fates over the last two years have not been uniform.
“There is a bifurcation between those who have pursued a traditional income strategy, who by and large are fine, because contrary to popular expectation, corporate dividends continue to be paid pretty much as expected,” says Mr Bevan. “If you had set up a strategy where you allowed some tolerance of capital market fluctuations and lived off the income stream you achieved, then the bulk of what we have experienced passed you by.”
On the other side of the tracks, foundations have been suffering for two reasons. Some charities have historically held a high proportion of their assets in cash and lived off the interest – although their asset levels have not been hit in the same way as those with risk assets, they have seen a massive drop in income as interest rates collapsed.
The other group in trouble, says Mr Bevan, are those who “gambled on the premise they would secure sufficient capital gains or total returns that they could spend a portion of their asset base and replenish it with growth. Clearly, a number of these investors have come unstuck”.
Although Mr Bevan is too tactful to be specific, his description of endowments, that “decided it was quite smart to pursue the return from skill” and assume they would be able to select managers sufficiently cleverly that “they could violate the fundamental laws of finance theory and have their free lunch” of increased return for the same risk, points quite clearly across the Atlantic to the likes of Yale and
In the US, many foundations followed the example set by the Harvard and Yale endowments, which pioneered the concept of multi-asset investing, and in many cases ran into trouble last year. They found their traditional investments were not providing sufficient income and their alternative investments were either massively reduced in value or entirely illiquid.
“We have run a relatively traditional strategy of seeking sustainable direct income flows from long-term capital and have managed to increase income through this period, and expect to continue to do so,” says Mr Bevan.
As far as the CCLA is concerned, there is no question of a trade-off between sustainable investment and returns.
Having done well for the financial needs of its clients over the past two years, it is now in the process of redesigning its investment process to meet the ethical and environmental concerns they have expressed.
A recent CCLA survey of its clients revealed about a third were interested in traditional ethical funds, excluding business sectors such as arms, tobacco and alcohol, while the remaining investors expressed a desire to have their assets managed in a sustainable way, using engagement to influence company practices towards international norms.
The United Nations Principles of Responsible Investment provide a useful general standard for asset managers, but CCLA’s clients expressed a strong priority for climate change to inform investment policies.
None of this is contrary to Mr Bevan’s primary aim of providing the returns his clients need, according to him. Indeed, some ethical investment areas are particularly suitable for some of his clients, given their long-term investment horizons and tolerance of capital volatility.
Microfinance (lending small amounts of money to individuals and businesses too poor to have access to mainstream banking) is a good example of this crossover.
“I would argue the real value creation will not come from determining whether to be over or underweight GlaxoSmithKline, but from determining where growth will be strongest and most sustained. That is typically in economies and areas most often served by microfinance.”
Microfinance is appropriate for CCLA’s investor clientele, explains Mr Bevan, because they are charities, faith organisations and local authorities. This means they tend to have long-term investment horizons without clearly defined liabilities. “I think the institutional funds that have the regulated recognition of risk [having to value assets and liabilities at market prices] will necessarily avoid this area,” says Mr Bevan, “because one would regard a corporation with a defined benefit pension scheme that is not matched to its liabilities as essentially running a hedge fund.”
Another area where tolerance of asset volatility can be exploited is in infrastructure investment. A few years ago, the CCLA looked into the possibility of entering the primary market, co-investing in infrastructure projects with experienced partners.
At the time, however, prices were unattractive as infrastructure had suddenly become very popular, while at the same time earlier investors were trying to get out of previous investments for various reasons. CCLA decided the secondary market would be more fruitful and is very happy with its decision. Prices in the secondary infrastructure market have collapsed as forced sellers accepted low prices, but the income flows have not necessarily fallen by the same amount.
“Luckily the charities world does not have the regulatory recognition of liability, and therefore is able to work through these difficult periods of valuation and can remain focused on notions of real value,” says Mr Bevan.
This does not mean there are no challenges for endowments, and no lessons to be learnt. Many of Mr Bevan’s clients are having to come to terms with “how tolerant they are of capital market fluctuations and what may be the true call upon those assets in periods of market distress”.
This understanding is vital for investors, he says. “It is unhelpful to travel hopefully without an understanding of the potential calls you have for capital.”