Last night something strange happened: the investment activity and remuneration policy of the Church Commissioners was discussed at a P.C.C. meeting I chair.
It was a slightly uncomfortable situation for me in that until nine years ago the majority of my career was in the fund management industry. In early 2007 I left the city and embarked on a journey that led to ordination. So there I was discussing ethical investing, portfolio construction and, fund manager remuneration with my P.C.C.
The makeup of the P.C.C. is varied but it is fair to say that the majority of its membership either currently work in, or are retired from, what might be referred to as vocational jobs: teachers, nurses and so forth. And, they are not impressed with the church, or at least it’s commissioners. They are angry about the holding in Alphabet / Google and, about the level of remuneration awarded to Mr. Joy (£255,000 base salary and £208,000 performance related pay). Are they being unreasonable? Is the P.C.C. a group of militant anti capitalist Marxists?
I don’t think so. They all live in a small market town in mid to north Buckinghamshire!
We spent a few minutes discussing the complexities of portfolio construction and asset allocation. I suggested that we don’t know the extent to which the Church Commissioners actively engage, as a shareholder, in seeking to improve the tax policy of companies in which they invest (we should – there is no reason why the Church Commissioners can’t detail their level of activity.)
We also discussed remuneration in the city and I made the point, somewhat squeamishly, that the fund management industry is incredibly highly paid, and that Mr. Joy (for the returns he seems to have generated) is almost certainly paid below the level of his ‘competitors.’
The P.C.C. I think accepted the point (or at least the facts of the matter) but continued to hold the view that the level of pay awarded to Mr. Joy is utterly excessive. The P.C.C. regard the C of E as a ‘vocational employer’and feel that this should always be reflected in the remuneration packages it offers. To their mind the level of total pay awarded to the likes of Mr. Joy means they have failed the ‘vocations test.’
The P.C.C. is also worried about what sort of message stories like this send out to the congregation at large. Why should our loyal congregants keep giving, how can we ask them to up their giving, when the Church seems awash with money? These are legitimate questions.
As I began to brood last night further questions arose in my mind:
How should we feel about a total return of 8.2% achieved in 2015?
The Church Commissioners blurb celebrates the return as a significant achievement but, should we actually be concerned?
How are the likes of Mr. Joy remunerated; should we be concerned that he is being encouraged or motivated to take significant and excessive risks in order to generate extra-ordinary returns, which in turn allow him to ‘max out’ on bonuses?
Starting with the investment return: The Church Commissioners first stated investment objective is to achieve a return of 5% in excess of inflation over the long-term. What did inflation average over the course of 2015? Well, certainly nowhere near 3.2% . In fact inflation on the first January 2015 was zero per cent. It then rose modestly during the year and has recently begun to fall.
The Church Commissioners have a further stated investment objective: to outperform the relevant stock market indices on the equity portion of the portfolio. The U.K. equity performance can therefore be measured against say the FTSE All Share Index. So how did U.K. equities perform in 2015 at the aggregate level? Well, the FTSE All Share Index produced a total return (capital growth plus dividends) of 1% (the figure for 2014 was 1.2%).
So how on earth did the Church Commissioners manage to achieve an investment return of 8.2%? It is a super normal return; eight times the return on inflation and the stock market average (not withstanding the fact that the property, in which the portfolio invests, performed extremely well, as did ‘private equity.’).
It,the return, could be all down to fund manager skill, with the fund managers selecting only ‘winning stocks’ and avoiding all ‘losing’ stocks, but I suggest this is unlikely.
It could be down to random luck, with excessive returns being generated by being on the right side of each and every piece of corporate activity. Again unlikely.
Or it could be because there is excessive risk in the portfolio; in my view probable, or at least highly possible.
Does this matter?
Well, yes because often when portfolios dramatically outperform their bench marks in a low return environment the worry is that such excessive risk (volatility) will become even more obvious – painfully obvious – when the portfolio begins to under-perform its benchmarks. If this happens the pain will be acute. I have been there and it hurts (but not those who have already banked their bonuses).
In the meantime Mr. Joy is being rewarded for the ‘skill’ he has shown, even though the returns are so out of kilter with what could ordinarily be expected from a well-managed, diversified portfolio.
We should be worried.
So what would I like to see from the Church Commissioners?
- Evidence of their level of engagement with Alphabet / Google (a company by the way that refuses to pay a dividend even though it could easily do so)
- Some published statistical data showing the level of risk in the portfolio
- Details of the mechanism by which fund manager bonuses are calculated and,
- A remuneration package which acknowledges the vocational nature of working in and for the Church of England
One final thought: last night I heard myself explaining that Mr. Joy works in a highly competitive industry, which has (post big bang) paid its executives super normal salaries and bonuses, and that whatever ‘we’ think of the level of his pay many of his ‘competitors’ will be paid substantially more.
However the nub of the issue is this: The Church Commissioners doesn’t have competitors. It doesn’t compete for external funds and its own portfolio of £7 billion is pretty much ring fenced. So does it need to pay a competitive market salary when it’s not really competing in the market place? I don’t think so. The Church Commissioners need to model pay restraint and promote the notion of vocational employment; me thinks.
In summary, over and above the ethics of investing in companies with a poor track record of paying tax in the countries where revenues are generated, my other big concerns are the level of risk in the portfolio and the thought that the Church may have ceased to regard itself as a vocational employer.
Thank you P.C.C. for bringing this issue to the table.