Church funds in good heart despite downturn
Its diversified investment strategy will protect the Methodist Church from the worst effects of the global financial crisis, says Methodist Trust Association (MTA) executive officer Greg Wright.
“The economic downturn looks to be much more entrenched and deeper than people considered six to eight months ago,” Greg says.
“Germane to the Church are the current lower interest rates. Low rates are very good for people with mortgages but that is less than half of New Zealanders. People in or approaching retirement, who are looking to supplement their pension with interest on investments, are seeing their returns shrink.
Greg points out that in September the Official Cash Rate (OCR) was 8.0 percent. Now it is 3.5 percent, and there is talk it will drop to 2.5 percent. Bank deposit rates have followed the cash rate down. This affects both the individuals who belong to the Church and the Church’s own investments.
“From the MTA’s perspective, back in August we could see a correction was coming so we locked in our Income Funds investments for two to three years at higher interest rates. While the distribution rates from the Income Fund will track down a bit, this year we expect them to be 1.5 times higher than the OCR. The OCR is currently at 3.5 percent and we expect the Income Fund to return at around 6 percent. If the OCR drops to 2.5 percent, we still expect to be able to deliver returns close to 6 percent.”
While the Income Fund’s immediate future is secure, the outlook for the MTA’s longer-term investment scheme, the Growth and Income Fund, is less bright. Whereas the Income Fund invests solely in fixed deposits that rely on interest payments, the Growth and Income Fund has a mixed portfolio that includes investments in shares, commercial property, and other financial instruments.
Greg says for more than a decade the Growth and Income Fund’s performance has been “riotous”. In the nine years to June 2008 it gave an average annual return of more than 16 percent. This compares to an average annual return of 10 percent, which was the benchmark for large investment funds such as superannuation schemes.
“Fortunately the Growth and Income Fund is well diversified and has virtually no exposure to the Collateralized Debt Obligations (CDOs) and mortgage-backed funds that are now returning 50 cents on the dollar.
“Nevertheless, we are looking at a loss of 6 to 7 percent for Growth and Income this year. We will not know the exact degree of loss for the year until June. The means anyone who wants to withdraw funds from Growth and Income before June is subject to a 10 percent withholding until the final evaluation is done.”
The drop in the Growth and Income Funds puts it back to the point that it was two years ago. Though it is a significant dip, Greg says the world’s stock exchanges are now looking at reductions of 20 to 40 percent.
“Over the long term we expect returns to Growth and Income to be positive. The Church cannot gain the benefits that are available from the commercial world without suffering the reversals that sometimes occur. In a context where many investors have seen their capital completely lost or seriously depleted, the Church’s funds are in very good heart.”