The Methodist Church of NZ has not escaped the global credit crunch that has seen some financial companies suffer big losses and governments intervene to prevent wider economic fallout.
The Methodist Trust Association (MTA) has announced that in the last financial quarter it suffered a capital loss for the first time in its 30 year history.
The loss came in the MTA’s ‘Income Fund A’, which delivered a distribution of 3.0% for the March 2008 quarter, compared to distributions of 7.5% in the previous two quarters. At the same time the MTA’s ‘Income Fund B’ and ‘Growth & Income Fund’ performed as well or better than they had in the previous two quarters.
The MTA is the investment arm of the Methodist Church of NZ. It receives money from organisations within the Church and pursues commercial investments to deliver attractive returns.
MTA executive officer Greg Wright says Income Fund A’s setback stemmed from its holding in Macquarie Fortress Notes. The yield from Macquarie Fortress Notes is derived primarily from a portfolio of secured American corporate bonds.
"The volatility in international financial markets has come from the unwinding of very easy credit in the United States, especially the so-called subprime loans in the residential housing market," Greg says.
"As interest rates rose, large numbers of marginal borrowers couldn’t maintain their mortgages. They had to default or sell up. This has been a principal cause of the upheavals that have impacted on financial institutions around the world.
"The MTA does not invest in high-risk, high-return financial instruments such as those based on subprime loans. Nevertheless, when interest rates rise, capital values drop so the effect can spread beyond that class of investments. Macquarie Fortress Notes had to revalue their investments and sell stock at a loss to repay loans.
"Macquarie Fortress Notes has now arranged new funding. We believe its write down was a one-off hit and its situation will now improve. Internationally the markets appear to have settled as the US Treasury and Federal Reserve have cut interest rates."
Greg says the MTA is well diversified and its underlying strength was not affected by its recent loss. He expects to continue to pay solid distributions in future.
The global financial crisis raises practical and moral dilemmas.
In terms of the NZ economy, high internal interest rates and a high Kiwi dollar have hurt exporters. On the other hand, it is positive for importers. In particular, petrol and energy prices have stayed relatively low.
"The current crisis also unveils some moral hazards," Greg says. "In several cases central banks have propped up failing finance houses. This means those who made really poor decisions were not saddled with the cost of those decisions.
"Those costs are transferred to taxpayers. That is not the way a market economy is meant to operate. But the ultimate shareholders in many of these companies are superannuation funds that carry the savings of hundreds of thousands of people."
Greg says there are also tensions when it comes to ethical investment. A mining company such as BHP Billiton supplies the iron, copper and aluminium that go into consumer goods, including such virtuous products as wind turbines, bicycles, and sewing machines. But mining can damage the environment.
"The MTA always invests on the basis of the Church's guidelines for ethical investment. Those guidelines were last reviewed by Conference in 1991, and it may be time to re-examine them."