peRseveRAnCe woRks - CFB

CFB AnnuAl RepoRt 2013

peRseveRAnCe woRks

Contents01 Ethical highlights 2013 10 Chairman’s statement 12 Investment review 17 Performance summary 24 CFB Council

MissionOur mission, alongside the church, is to seek practical solutions which combine Christian ethics and investment returns.

we theReFoRe AiM…To provide a high quality investment service seeking above average returns for investors.

To follow a discipline in which the ethical dimension is an integral part of all investment decisions.

To construct investment portfolios which are consistent with the moral stance and teachings of the Christian faith.

To encourage strategic thinking on the ethics of investment.

To be a Christian witness in the investment community.

FoR detAiled Reviews oF the CFB AppRoACh to ethiCs And investMent, see the Joint AdvisoRy CoMMittee on the ethiCs oF investMent’s AnnuAl RepoRt to the Methodist ConFeRenCe And the quARteRly soCiAlly ResponsiBle investMent Review FoR CFB Clients. www.cfbmethodistchurch.org.uk/ethics

1 Central Finance Board of the Methodist Church Annual Report 2013

ethiCAl highlights 2013

ConsistenCy woRksA Consistent BiBliCAlly BAsed AppRoACh to ethiCs integRAted into ouR investMent pRoCess Continues to Be A hAllMARk oF the CFB.

In the following pages we explore some of the ethical issues with which we have grappled in the past year as we seek to change businesses for the better, in our mission to provide good investment returns through portfolios that are consistent with the aims of the Methodist Church.



integRity woRksBAnking is At the heARt oF the FinAnCiAl systeM And An essentiAl pARt oF A ModeRn eConoMy But it will only RetAin its liCenCe to opeRAte iF it CAn Be tRusted By soCiety.

Global banking has been under close scrutiny from regulators and society at large for fixing the LIBOR rate, money laundering and the mis-selling of both payment protection insurance and interest rate swaps. We examined these systemic ethical failings and outlined possible improvements in a paper, Ethical Issues Arising from Banking (see website). This was used to inform our engagement with the quoted UK banks, all of which have had ethical issues that needed to be addressed in the past year. The Methodist Church’s Joint Advisory Committee on the Ethics of Investment report, Banking on the Banks, examines these in more detail.


FAiRness woRkssoCiety hAs BeCoMe inCReAsingly unhAppy ABout eXCessive levels oF eXeCutive ReMuneRAtion But oF MoRe ConCeRn to us is the inJustiCe oF FAiling to pAy A living wAge.

The Living Wage is the minimum level that allows workers to support themselves and their dependents. Not only is this a matter of justice, it is also widely recognised as being good for both employers and the wider community. Over the past year the CFB not only became an accredited Living Wage employer, but engaged with a number of companies encouraging them to follow suit. We have been struck by the generally positive responses, whilst continuing to encourage those opposed to reconsider their position. At the same time we have continued to take an active position on excessive remuneration, opposing or abstaining on over 80% of UK company remuneration reports.



ModeRAtion woRkseXCess ConsuMption oF AlCohol BRings with it A MAJoR Cost in teRMs oF CRiMe And heAlth.

Changing consumption patterns in recent years indicate the need to emphasise the message of moderation. Consequently, JACEI has been working on a revision to its advice and in September a new Position Paper and Policy on investment in alcohol related companies was approved, replacing the Policy dating from 2002. Avoidance will remain the normal position in relation to companies mainly involved in the sale or production of alcohol. However, the new Policy recognises the need for proactive engagement with those companies that have a significant, but not major, exposure to alcohol. In these cases we will focus on responsible drinking and ensuring advertising and marketing does not encourage excessive drinking, with particular emphasis on the young.


MoRAlity woRkshuMAn tRAFFiCking eXploits the Most vulneRABle MeMBeRs oF soCiety. Business CAn MAke A diFFeRenCe By tAking A stAnd to MiniMise the Risk oF this hAppening.

The hospitality industry is particularly exposed to trafficking risks and we have continued to work with global Church investors to reduce them. Using the London 2012 Olympic Games as the catalyst, we focused on the UK hotel industry and the risk of ‘on-premises child and labour trafficking’. We were a signatory of a letter sent to companies raising their awareness of the problem and calling for action, through staff training and monitoring, to protect children from sexual exploitation. We were particularly encouraged by the positive response of UK hotel companies, with Whitbread and IHG taking considerable action in contrast to their attitude when the matter was first raised.



ResponsiBility woRkseXtRACtive industRies CAn MAke hugely positive eConoMiC And soCiAl ContRiButions to the Regions wheRe they opeRAte, But only iF they BehAve ResponsiBly. It is particularly important to hold mining and oil companies to account for their environmental, safety and community performance. Last year this included meetings with Anglo American, BHP Billiton, Randgold Resources, Rio Tinto and Xstrata. In addition Senior Fund Manager, Stephen Beer, visited Nigeria as part of a Royal Dutch Shell investor delegation to see at first hand the challenging operating conditions and the risks faced from sabotage and ‘bunkering’. He also met with local NGOs working on the ground as part of a process to rebuild trust with local communities (see website for fuller report). Close contact was also maintained with BP as part of an investor coalition seeking the improved safety regime and better shareholder communications which the company needs to rebuild confidence following the Gulf of Mexico disaster.


sustAinABility woRksto pRovide FoR A RApidly Rising woRld populAtion And to ReduCe the inequAlities Between RiCh And pooR it is iMpoRtAnt to hAve heAlthy, gRowing And sustAinABle Businesses.For companies to grow sustainably it is important that their greenhouse gas emissions are minimised and the first step towards this is to measure them. The annual CDP survey of 6,000 companies enables us to identify those that take this matter seriously. The Church Investors Group (CIG) uses this information to encourage the laggards, particularly in carbon intensive sectors, to improve their performance and as a result 55 of the FTSE 350 companies were contacted following the 2012 survey. This enables the CFB to concentrate its efforts and last year we targeted the Go-Ahead Group, ITV and Aggreko. The result was either commitments by them to respond to future CDP surveys or the provision of evidence demonstrating that robust measurement and disclosure processes were in place. In the current year the targeted companies are Capita, Elementis and Spirent Communications.



pARtneRship woRksenCouRAging CoMpAnies to liMit gReenhouse gAses is Most eFFeCtive when done in pARtneRship with otheR investoRs.

The CFB is a member of the €7.5 trillion European investor collaboration, the Institutional Investor Group on Climate Change. We are also signatories of the $87 trillion investor initiative, CDP, which provides the largest collection of self reported environmental information on greenhouse gas emissions, water usage and deforestation. Our work through IIGCC and CDP enables us to assess climate change risks better and target more effectively our efforts to encourage the reduction in carbon emissions. Other examples of partnership with the wider investment community include the Access to Medicines Index and the Access to Nutrition Index. For more detail see the CFB quarterly SRI Review on our website.


witness woRksouR ChRistiAn witness hAs the gReAtest iMpACt when ouR ACtions CAn Be seen to MAtCh ouR woRds And when the ChuRChes woRk togetheR.

It is important to be able to judge whether we are fulfilling our ethical pledge. We provide a complete list of our investments on our website together with a summary of our voting record. We provide comparable scores between our UK equity portfolio and the market as a whole using EIRIS to measure them against our overall ethical criteria and Trucost to measure their carbon footprints. CFB engagement is increasingly carried out with other churches, both in the UK and globally. CIG members participate together when meeting companies and the information obtained is shared, increasing our capacity to raise and follow through ethical issues with managements. There is now a reciprocal agreement with the Church of England to observe at our respective ethical advisory committee meetings.


déJà vuIn my previous two annual statements I questioned the level of investor complacency. In both the years that followed UK equity prices fell sharply, but ended strongly. In the latest period under review the FTSE All Share Index fell 12% between March and June but then surged higher ending February 14% above the level it began a year earlier. This was the fourth successive year of rising prices resulting in a return of almost 20% pa. In contrast the economy has done little more than move sideways as an extended period of austerity has been initiated in a, so far, unsuccessful attempt to reduce government debt. Despite extremely low interest rates, mortgages and business loans seem difficult to obtain, whilst the European Union, our largest trading partner, seems to lurch from one financial crisis to another. This is far from an ideal background for equities and valuations are no longer cheap. Although gilt returns failed to match inflation last year, bond yields are close to their lowest ever levels. Once again I am tempted to ask whether investors have become too complacent.

oveRseAs equities leAd the wAyHelped by a 3% fall in sterling the Overseas Fund (+16.7%) produced the best returns for CFB investors. This was followed by the UK Equity (+14.4%); Corporate Bond (+9.0%) and Inflation Linked (+6.5%) funds. The Short Fixed Interest Fund (+3.4%) matched the rise in the Consumer Price Index, but the Property (+3.2%), Gilt (+2.6%) and Deposit (+1.3%) funds all failed to do so. Relative to benchmark the best performance was from the Property Fund (+3.0%), followed by the Overseas Fund (+0.7%) in spite of external fees and taxes of 0.7%pa. Unfortunately, the UK Equity Fund lagged behind its benchmark (-0.3%) although it matched the ethically unconstrained index following a year that for once did not penalise our approach. The Short Fixed and Inflation Linked funds were boosted by exposure to corporate bonds and outperformed their gilt only benchmarks (by 1.1% and 0.7%, respectively). Relative to benchmark the Corporate Bond Fund also outperformed (+0.2%), whilst the Gilt Fund was in-line.

the inCoMe dileMMATraditionally, bonds have provided a high and stable income, but this is no longer the case. An extended period of a low interest rates and quantitative easing has brought bond yields to very low levels. This has resulted in steadily falling distributions by the CFB Short Fixed, Gilt and Corporate Bond funds down by 40%, 33% and 16% respectively over the past five years. Investors have benefitted from an increase in values, but today the Short Fixed and Gilt funds yield only 2.5%, with a slightly more attractive 3.8% on the Corporate Bond Fund. Index linked coupons rise with inflation, but this has not prevented the Inflation Linked Fund distribution falling by 29% over the past five years resulting in a yield of

ChAiRMAn’s stAteMent

ethiCAl pledge: the seCuRities held By All CFB Funds will, to the Best oF ouR ABility, Be in line with the ethiCAl poliCy oF the Methodist ChuRCh.

RogeR sMith Chairman

As presented at the CFB AGM on 25 April 2013


not much above 1%. Equity investors have always been aware that dividends can fall, but expect an upward trend. However, the cuts in 2009 and 2010 led by BP and the banks means that the UK Equity Fund distribution is up less than 1% over the past five years, with the distribution last year still 14% below its peak of four years ago and a current yield of 3.1%. In contrast the Overseas Fund distribution is up 66% over the past five years, although the yield is a modest 1.7%. There has been a temptation to move from bonds to equities to increase income, but this comes with an increased risk of falling prices. The Deposit Fund distribution rate was 5.1% five years ago, but was only 1.3% last year. Although, capital values are as secure as possible, the rate payable continues to decline and the current rate of 0.99%, whilst more attractive than alternatives, is scarcely enticing.

ethiCsIn the past year scrutiny of the ethics of the business world has intensified. The banking industry continues to be the main focus, with systemic failures such as the fixing of LIBOR and the mis-selling of payment protection insurance and interest rate swaps. Regulatory breaches have led to massive fines being imposed and there is widespread disgust of continued payment of excessive bonuses. Unsurprisingly, this has been a major focus of our ethical work in the past year. In addition to extensive engagement with Barclays, HSBC, Lloyds and Standard Chartered, we published a paper, Ethical Issues Arising from Banking, on our website. There was considerable engagement on climate change. Senior Fund Manager, Stephen Beer, visited Nigeria to see the Shell operation at first hand, his report was published in both the Methodist Recorder and the Financial Times, neatly bridging the two worlds inhabited by the CFB. We continued to be involved with the international ecumenical efforts centred on the London Olympics to raise awareness of human trafficking and encourage hotel groups to minimise the risk that their premises could be involved. It was pleasing to see the change from one of indifference to active engagement particularly through improved staff training. Our Policy on Alcohol was updated and we joined investor coalitions encouraging pharmaceutical companies to improve global access to medicines and food companies to improve their policies, practices and performance in relation to nutrition.

looking to the FutuReIt is good to be able to report that total funds under management are once again in excess of £1 billion, having increased by over £60 million last year, although all but £1 million was due to increased security prices. Although welcome, this cannot be relied upon in long term planning for the CFB and it is prudent to build up our reserves. This will enable us to withstand sudden shocks, such as from the

withdrawal of substantial funds as occurred two years ago or a sharp fall in security prices as happens with frightening regularity. Our current lease expires in Spring 2014 so we will need to consider our future office requirements and the likelihood of higher rent as well as moving costs. Considerable attention has been given to what is needed to run an appropriately resourced professional investment operation that meets the needs of Methodism. Current staff resources have been stretched too thinly and we need to relieve the pressure through additional staff and investment in new technology. Inevitably, this will involve some increase in charges. However, we believe there is demand for our low risk ethical approach to investment which should allow us to build up funds under management through our sister organisation Epworth Investment Management Limited. By investing modestly, we will boost our ability to continue providing a relatively low cost, high quality ethical investment service for both Methodism and the wider charity sector.

FARewells And thAnksThe governance of the CFB is unique, based as it is on the Methodist Church Funds Act, 1960. This does not necessarily correlate well with standard practices in either the charity or financial world. We have given considerable thought to how these differences can be reconciled and I would like to thank Board member, Alan Pimlott, for his help. Two long standing members of the CFB Council are standing down. Richard Reeves was Vice Chairman between 2005 and 2012, sat on the Audit and Remuneration committees as well as representing the CFB on the Epworth Board. His wise counsel will be sorely missed as will his witty and thought provoking contributions when leading Council’s devotions. Ted Awty has also served the CFB with distinction and whilst we say farewell to him as a colleague, we will continue to work closely with him in his role as a Connexional Treasurer. I am very grateful for the hard work and considered judgement of all the Council. Methodism is extremely fortunate to have such well qualified individuals serving it through the CFB. I would also like to pay tribute to Bill Seddon and all the staff. They have worked tirelessly and efficiently on behalf of the Church. Our long-standing Secretary and Chief Financial Officer, Peter Forward retired last June and was replaced by Marina Philips. My thanks go to Peter, Marina and all the staff in making the transition as smooth as possible.

peRseveRAnCeThe past year has in many ways been a tough one for the CFB. There may have been no big operational changes, markets may have been relatively strong and no new high profile ethical issue may have arisen. However, it has as always been a year of a great deal of hard if unspectacular work, which enables the CFB to provide the service required by Methodism.


investMent Review

gloBAl eConoMiC BACkgRound Global purchasing managers’ manufacturing indices (PMIs) fell back in February, although this followed three successive monthly rises and at 50.8 it continued to point towards expansion. However, it is hard to talk of a global trend as there were significant divergences at the regional level. PMIs were strong in the US, Japan, Australia and India, but this was outweighed by falls in China and an accelerating decline in Europe. Even a modest acceleration seems unlikely if both Europe and China experience further economic weakness.

The US economy appears to be in much better health than had been feared given the impact of $200bn of tax increases and public spending sequestration of $85bn. Job creation was strong in February with unemployment falling to 7.7%, its lowest level for five years, mostly due to accelerated hiring by the construction industry. There was even a surprising increase in consumer spending in January compared to the previous month. There is currently a debate among economists about the ‘multiplier’ effects of changes in fiscal policy. It seems that when an economy is in fairly robust health, as the US appears to be at present, the multiplier is less than 1x. Therefore, the impact on the US of the $285bn fiscal tightening, which equates to 1.8% of the economy, will be less than 1.8%. Consequently, US growth forecasts for this year, which before the tax and spending cuts were around 3.3%, are now being revised up from 1.5% to between 2% and 2.5% with a further acceleration to 4% expected in 2014.

The Japanese economy has been depressed for many years, but recently Prime Minister Abe’s pro-growth policies, combined with the significant yen weakness, have resulted in a sharp improvement in forward looking indicators such as business and consumer confidence as well as PMIs. Consequently the Bank of Japan predicts growth of 1.0% in the fiscal year to March 2013, rising to 2.5% for the following year. Recent data from China, on the other hand has been disappointing, with both retail sales and industrial production below forecasts. However, the government has reaffirmed its 7.5% growth target for this year compared to the 7.8% achieved last year.

Bill seddon Chief Executive

the us eConoMy AppeARs to Be in MuCh BetteR heAlth thAn hAd Been FeARed given the iMpACt oF $200Bn oF tAX inCReAses And puBliC spending sequestRAtion oF $85Bn.


Recent data provides little scope for optimism in Europe with unemployment reaching 11.9% and retail sales falling 1.3% in the year to January, although that was at least an improvement on December’s 3.0% decline. In 2012 Eurozone economies declined 0.9% and the European Central Bank (ECB) currently expects a 0.5% decline this year. Perhaps the most worrying aspect of recent economic data is growing evidence that the economic weakness which has been prevalent in southern European countries is now spreading to France, where the government has cut its forecast for current year growth from 0.8% to 0.1%. Indeed, the risk is that with Europe not expected to return to the 2007 economic peak until 2017, it may experience similar prolonged stagnation to that of Japan over the last twenty years.

uk eConoMiC BACkgRound In February the Office for National Statistics revised up its estimate for GDP in 2012 from flat to growth of 0.2%. However, it also reaffirmed its estimate that GDP fell 0.3% in final quarter of 2012. Recent data paint a picture of the UK economy struggling to grow as industrial production fell 1.2% in January, with manufacturing production down 3.0%. However, the larger service sector saw its PMI rise, which continues to suggest that the overall economy is growing, albeit at a very pedestrian pace. The Bank of England appears to be adopting a relaxed approach towards inflation and is content to see sterling fall, although more recent comments from Sir Mervyn King suggest he believes the fall has gone far enough. Last year trade performance was a drag on UK GDP and whilst a lower exchange rate should make exports more competitive, there needs to be a demand recovery from major trading partners if it is to help rebalance the UK economy. For the present there seems no pressure for anything other than a continuation of the current loose monetary policy.

Much hope has been placed on the Funding for Lending Scheme (FLS) but while this has increased the supply of credit the take up of new bank loans has been slow, with those under the FLS actually falling in the last quarter of 2012. However, grounds for cautious optimism remain. So far job creation is at a similar pace to the last recovery, consumers have paid down a substantial amount of debt, personal insolvencies have been falling, the savings ratio has increased and real consumer spending has been rising. It only requires the rate of household debt repayment to slow for consumption to accelerate above current forecasts. While the UK economy remains unbalanced and faces the challenge of low productivity, even a small improvement in household and business confidence could see GDP growth exceed expectations.

the BAnk oF englAnd AppeARs to Be Adopting A RelAXed AppRoACh towARds inFlAtion And is Content to see steRling FAll.

us tReAsuRy 10 yeAR yield %4.50

3.70

2.90

2.10

1.30March 2008 February 2013


MARket outlookMoney MARketsRecent meetings of the European Central Bank (ECB) and the Bank of Japan (BOJ) kept monetary policy unchanged, although BOJ Governor-elect Kuroda indicated that a large scale quantitative easing programme (QE) will be launched. Conversely, US Federal Reserve Chairman Bernanke in his half yearly testimony to Congress said there is unlikely to be any near-term change to the Fed’s current QE programme. Although the Bank of England’s Asset Purchase Facility remains at £375bn, interest rates available in the wholesale money markets continue to edge lower as do the premium rates available directly from some banks, a trend considered likely to continue. Therefore, the Deposit Fund will continue to place longer term deposits where attractive rates are available while maintaining credit quality.

FiXed inteRestBefore the Cypriot banking crisis erupted Eurozone bond markets had been quiet, with German ten year yields stable at around 1.5%. Those of peripheral bond markets continued to fall, with Spanish yields down from a peak of 7.5% in July to 4.8% as investors become less worried about contagion from Italy. This air of complacency led to ‘safe haven’ markets such as the US appearing less desirable with the ten year US Treasury yield temporarily moving back over 2%, before dropping to 1.7%, the lowest level since December. At this level there is little recognition that the US economy appears to be holding up well despite recent fiscal tightening. Indeed, if the recent improvement in the labour market continues, the Fed’s 6.5% unemployment target could be reached early in 2014, implying that QE might come to an end this year and signal an impending turn in the US rate cycle.

The downgrade of the UK credit rating from AAA to AA1 by Moody’s had been largely expected by investors. Ten year gilt yields continued to move lower following the announcement and with rising expectations of further QE and possible fall-out from Cyprus they are now at 1.7%, the lowest level since September. Gilt yields have remained low despite equity market strength and rising inflation expectations. However, at current yields there is little value and prices are vulnerable to signs of stronger sustainable economic growth and inflation becoming more embedded. We continue to underweight gilts in our asset allocation strategy and to maintain Gilt Fund duration below that of its benchmark.

investMent Review Continued

10 yeAR inFlAtion linked gilt yield %-0.30

-0.55

-0.80

-1.05

-1.30March 2012 February 2013

yield pReMiuM oF CoRpoRAte Bonds oveR gilts %6.00

4.50

3.00

1.50

0March 2007 February 2013

gilt yields hAve ReMAined low despite equity MARket stRength And Rising inFlAtion eXpeCtAtions.


In recent months there has been heavy selling of corporate bond funds and a worrying fall in the price of high yielding ‘junk’ bonds, often an early indicator of a coming setback in the broader market. Therefore, whilst we continue to prefer high quality corporate bonds to gilts over the long-term, increased exposure should await a higher yield premium. Similarly, it seems appropriate to raise the credit quality of portfolios.

The strength in the conventional gilt market coupled with rising inflation expectations has continued to fuel demand for index linked securities as investors adjust to a more relaxed policy stance towards inflation. The real yield of the ten year gilt reached a new low close to -1.6%. Unless inflation turns out to be much greater than expected, it is difficult to see the attraction of the index linked market at current levels and it remains vulnerable to a rise in conventional yields.

CuRRenCies And oveRseAs equitiesThe lessening of the UK’s safe haven status can be seen most clearly in the 7% fall in sterling’s trade weighted index this year. It would not be surprising if sterling was to stabilise for a time after such a sharp decline over relatively brief period, but longer-term it may have further to fall compared to the dollar if not against the Euro.

Sterling weakness has had a positive impact on global equity markets for UK investors, with the FTSE All World ex UK Index reaching a new high for the first time since 2000. In the short-term further help from sterling weakness does not seem particularly likely, but even in local currency terms equity markets have rallied strongly since last summer and look overdue for a correction. There are also signs that the ‘risk-on, risk-off’ investment strategies (Ro-Ro) that have dominated most security markets since the financial crisis began in 2007 may be coming to an end. If the ‘Ro-Ro’ markets are indeed ending, it suggests growing investor confidence that developed economies such as the US may at last be emerging from the financial crisis. If the economic stagnation of Europe is prolonged its equity markets could experience a sustained period of relative underperformance and a significantly underweight position remains appropriate. However, better growth prospects in the US and Pacific together with recovery prospects in Japan, suggest overweight positions in these markets. The outlook for relatively strong global growth and the prospect of further sterling weakness in due course indicate a continued preference for overseas compared to UK equities.

Ftse All shARe indeX vs Ftse All woRld eX uk indeX

15.30

15.10

14.90

14.70


steRling weAkness hAs hAd A positive iMpACt on gloBAl equity MARkets FoR uk investoRs.

steRling/$ eXChAnge RAte

2.10

1.90

1.70

1.50



uk equities Continued optimism about earnings growth prospects has driven the UK market higher as investors became increasingly happy to take on more risk in the hope of higher returns. Before the problems in Cyprus saw a return of investor nervousness that encouraged profit taking, the FTSE All Share Index was 25% above the low point of last summer and within 2% of its all time high, in June 2007.

The strong performance resulted in the trailing PE ratio moving to over 15x. For equities to sustain a further rise, earnings need to increase in line with or above expectations. Earnings momentum also appears to be positive with FTSE All Share earnings estimates up by 2% so far this year. The fall in sterling is positive for reported earnings given the international exposure of the UK market, as only 24% of FTSE 100 revenues derive from the UK. As overseas earnings are translated into a higher sterling figure there is scope for further price rises for any given PE ratio. Similarly there is a positive currency effect on dividend income if the fall in sterling is sustained, with around 42% of UK equities dividends denominated in US dollars. However, if businesses conditions remain uncertain, or if economic growth is not forthcoming, equity markets may be exposed at current levels. Equities remain our preferred long term UK asset given the high equity yield premium over gilts. However, history suggests the scope for sustainable price rises is limited in the short term and the risk of a setback has increased. Therefore, further increases in exposure should take place at lower levels.

investMent ReviewContinued

CFB Funds peRFoRMAnCe 2013For more detail of our funds performance please go to www.cfbmethodistchurch.org.uk/2013

Risk wARningCFB Funds are designed for long term investors. While we hope that unit values will rise, prices can and do fall. They are not suitable for you to use if you cannot accept the possibility of capital losses.

10 yeAR gilt yield RelAtive to Ftse All shARe indeX yield

2.70

2.10

1.50

0.90



MAnAged Funds

peRFoRMAnCe To 28 February 2013 1 year % 5 years %pa

CFB Managed Equity Fund +14.4 +6.1

Managed Equity Fund Composite Index +14.4 +6.3

Managed Equity Fund Composite Index (ethically adj) +14.7 +6.1

CFB Managed Fixed Interest Fund +3.8 +6.9

Managed Fixed Interest Composite Index +3.2 +6.5

CFB Managed Mixed Fund +11.6 +6.4

Managed Mixed Fund Composite Index +10.9 +6.5

Managed Mixed Fund Composite Index (ethically adj) +11.1 +6.3

key FACts As at 28/02/13 29/02/12

Managed Equity Fund

Fund size £52.5m £42.2m

Price per unit 1990.8p 1795.9p

Distributions for year per unit 56.60p 53.89p

Yield (on distribution in past year) 2.8% 3.0%

Managed Fixed Interest Fund





Managed Mixed Fund





investMent oBJeCtivesMAnAged equity FundOver rolling five year periods, to achieve through holdings in the CFB UK Equity and Overseas funds, a total return equal to or in excess of the composite index measuring the constituent asset classes.

MAnAged FiXed inteRest FundOver rolling five year periods, to achieve through holdings in the CFB Gilt, Corporate Bond and Short fixed interest funds, a total return equal to or in excess of the UK Government fixed interest market.

MAnAged MiXed FundOver rolling five year periods, to achieve through holdings in the CFB UK Equity, Overseas, Gilt, Corporate Bond, Short Fixed Interest, Inflation Linked and Property funds, a total return equal to or in excess of a composite index measuring the constituent asset classes.

investMent pARAMeteRsMAnAged equity FundCFB UK Equity Fund 80-90%; CFB Overseas Fund 10-20%.

MAnAged FiXed inteRest FundCFB Gilt Fund 30-50%; CFB Corporate Bond Fund 5-15%; Short Fixed Interest Fund 40-60%.

Modified duration of 25% FTSE up to 5 years Gilts Index; 25% of FTSE 5 to 10 years Gilts Index; 40% of FTSE All Stocks Gilts Index and 10% Corporate Bond Fund Composite Index +/-1.5 years (as at 28 February 2013: 4.9 to 7.9 years).

MAnAged MiXed FundFixed Interest 15-35% (of which CFB Gilt Fund 10-20%; CFB Corporate Bond Fund 0-5%; Short Fixed Interest Fund 5-15%); Equities and Inflation Linked 60-80% (of which CFB UK Equity Fund 50-70%; CFB Overseas Fund 5-15% and CFB Inflation Linked Fund 0-5%); CFB Property Fund 0-10%.

poRtFolio detAilsDetails of the Fund, including a full list of investment holdings can be found at:

www.cfbmethodistchurch.org.uk/managedfunds/index.html

Valuation dates Last, 10th and 20th of month

Dealing dates 1st, 11th and 21st of month

Ex distribution dates 28 Feb, 31 May, 31 Aug and 30 Nov

Distribution dates 20 Apr, 20 Jul, 20 Oct and 20 Jan

dilution levyMAnAged equity Fund 0.26% of single priced unit value.

MAnAged FiXed inteRest Fund0.13% of single priced unit value.

MiXed Fund0.35% of single priced unit value.

totAl eXpense RAtio To avoid double charging no additional expenses are levied on the Managed Funds.


uk equity Fund

MARket Review • UK equity prices fell sharply in March and April before

beginning to rally in June. The market took a breather during the autumn, but in November it surged higher and by the end of February the FTSE All Share Index was approaching its all time peak, up 10.0% on the year for a total return of +14.1%.

• The returns on the largest companies lagged behind those of smaller ones: (FTSE 100 Index +12.4%; FTSE Mid 250 +23.3%).

• Main positive relative contributors to All Share returns over the year were: Banks, Beverages and Travel & Leisure.

• Main negative relative contributors over the year were: Oil Producers, Mining and Oil Services.

• The return on the CFB ethically adjusted benchmark exceeded that of the All Share Index by 33bp over the year. Ethically excluded stocks accounted for 15.0% of the Index.

peRFoRMAnCeTo 28 February 2013 1 year % 5 years %pa

CFB UK Equity Fund +14.1 +5.7

FTSE All Share Index +14.1 +6.0

FTSE All Share Index (eth adj) +14.4 +5.8

Stock selection in the Cyclical and Financial sectors was the main contributor to underperformance over the year but returns relative to the ethically adjusted Benchmark were positive over two years (+8.5%pa vs +8.2%pa) as well as five years.

key FACts As at 28/02/13 29/02/12





investMent oBJeCtivesOver rolling five year periods, to achieve mainly through a portfolio of UK equities, a total return equal to or in excess of the UK equity market.

investMent pARAMeteRsUK equities 95-100%; Cash 0-5%.


www.cfbmethodistchurch.org.uk/equityfunds/index.html





dilution levy0.28% of single priced unit value.

totAl eXpense RAtioDeducted from distributions before payment 0.28% (including transaction costs).

Ftse All shARe indeX

3400

3225

3050

2875

2700March 2012 February 2013


MARket Review• The FTSE All World ex UK Index followed a similar pattern

to the UK market although its rally began in May and it closed the year at a new all time peak, up 12.8% for a total return of +16.0%, 1.9% more than that of the FTSE All Share Index.

• The outperformance of equities overseas relative to the UK was largely due to currency movements. Over the year sterling fell against the $ (-5.7%) and € (-2.7%) but rose against the ¥ (+8.6%).

• North America (+18.3%) was the best performing region over the year followed by Europe (+17.5%). All the others lagged the Index: Pacific (+15.2%); Japan (+10.5%); Rest of the World (-1.5%).


CFB Overseas Fund +16.7 +8.0

FTSE All World ex UK Index +16.0 +7.9

Asset allocation was the main positive contributor to relative performance, but stock picking was also favourable particularly in the Pacific. These were offset by the negative impact of tax and external fees (approx 0.65%).

key FACts As at 28/02/13 29/02/12





investMent oBJeCtivesOver rolling five year periods, to achieve mainly through a portfolio of overseas equities and inflation linked securities, a total return equal to or in excess of non-UK equity markets.

investMent pARAMeteRsOverseas equities 90-100%; Inflation Linked securities 0-5%; Cash 0-5%.

Regional exposure (as FTSE All World ex UK Index): North America (currently 53.2%) +/-5%; Europe ex UK (currently 19.0%) +/-5%; Japan (currently 7.8%) +/-5%; Pacific ex Japan (currently 15.4%) +/-5%; Rest of World (currently 4.6%) +/-5%.


www.cfbmethodistchurch.org.uk/equityfunds/index.html





dilution levy0.12% of single priced unit value.

totAl eXpense RAtio Deducted from distributions before payment 0.69% (of which CFB expenses and transaction costs 0.20%, external managers and trustee charges 0.49%).

oveRseAs Fund

Ftse All woRld eX uk indeX

230.0

217.5

205.0

192.5



Bond Funds

MARket Review• Safe haven bond yields were little changed over the year.

At the beginning of last March the 10 year US Treasury yield was at 1.97%. Initially it rose to 2.38% before steadily falling to a low of 1.39% in July. However, by mid-February it was back above 2% before ending the year at 1.88%.

• Gilts followed a similar pattern with the 10 year yield starting the year at 2.15%, soon peaking at 2.45% before declining to reach 1.45% in early August. Prices fell through most of the second half, and the yield reached 2.22% before a late flurry saw it return to 1.97% by the end of February.

• The gradient of the yield curve steepened slightly with the 2 year gilt yield falling by 17bp to 0.24% and the 30 year gilt yield up 4bp to 3.27%.

• Apart from a short sharp fall around the turn of the year, index linked prices have risen steadily since last March. The 10 year real yield began at -0.57%, peaked at -0.34% and closed at the low of -1.21%.

• The average premium of corporate bond yields over government bonds began at +261bp, ranged between +289bp and +158bp and closed at +168bp.

• The spread between AAA and BBB rated bonds opened at +326bp, moved between +387bp and +220bp before closing at +243bp.

• Over the year corporate bonds outperformed index linked gilts, which in turn outperformed conventional gilts. Long dated issues outperformed short: iBoxx Non Gilts +10.1%; FTSE All Stocks Index Linked +5.8%; FTSE Over 15 Years Gilts +2.8%; FTSE All Stocks Gilts +2.5%; Short dated Composite +2.3%.


CFB Gilt Fund +2.6 +7.0

FTSE All Stock Gilt Index +2.6 +6.9

CFB Short Fixed Interest Fund +3.4 +6.3

Composite Index (gilt only) +2.3 +6.1

Composite Index (incl corp bonds) +3.8 +6.2

CFB Corporate Bond Fund +9.0 +8.3

iBoxx Non Gilts Index +10.1 +7.3

Composite Corporate Bond Index +8.8 +6.7

CFB Inflation Linked Fund +6.5 +8.2

FTSE All Stock Index Linked Index +5.8 +8.1

Composite Index (incl corp bonds) +6.5 +8.3

key FACts As at 28/02/13 29/02/12

Gilt Fund





Short Fixed Interest Fund





Corporate Bond Fund





Inflation Linked Fund





uk 10 yeAR gilt yield

2.60

2.30

2.00

1.70



investMent oBJeCtivesgilt FundOver rolling five year periods, to achieve mainly through a portfolio of long-dated sterling denominated UK Government securities with an income yield close to the redemption yield prevailing on UK Government securities, a total return equal to or in excess of the UK Government fixed interest market.

shoRt FiXed inteRest FundOver rolling five year periods, to achieve mainly through a portfolio of short-dated sterling denominated fixed interest securities with an income yield close to the redemption yield prevailing on short-dated UK Government securities, a total return equal to or in excess of the short-dated UK Government fixed interest market.

CoRpoRAte Bond FundOver rolling five year periods, to achieve mainly through a portfolio of sterling denominated corporate and sub-sovereign fixed interest securities, a total return equal to or in excess of the UK corporate bond market.

inFlAtion linked FundOver rolling five year periods, to achieve mainly through a portfolio of sterling denominated securities linked to the Retail Price Index or similar measure of inflation, a total return equal to or in excess of the UK Government Index Linked market.

investMent pARAMeteRsgilt FundGovernment securities 95-100%; Cash 0-5%.

Modified duration of FTSE All Stocks Gilts Index +/-1.5 years (as at 28 February 2013: 7.5 to 10.5 years).

shoRt FiXed inteRest FundGovernment securities 70-90%; Debentures and unsecured loans 10-30%; Cash 0-5%.

Modified duration of 50% FTSE up to 5 years Gilts Index and 50% of FTSE 5 to 10 years Gilts Index +/-1.5 years (as at 28 February 2013: 2.8 to 5.8 years).

CoRpoRAte Bond FundCredit ratings AAA and AA 55-85%; Other investment grade or secured issues 15-45%; Cash 0-5%.

Modified duration of iBoxx Non-gilts AAA Index 30%; AA Index 40%; A Index 25%; BBB Index 5% +/-1.5 years (as at 28 February 2013: 6.6 to 9.6 years).

inFlAtion linked FundGovernment securities 80-100%; Debentures and unsecured loans 0-20%; Cash 0-5%.

Modified duration of FTSE Index Linked All Stocks Gilts Index +/-1.5 years (as at 28 February 2013: 16.2 to 19.2 years).


www.cfbmethodistchurch.org.uk/fixedinterestfunds/index.html

The Corporate Bond Fund invests entirely through the Affirmative Corporate Bond Fund for Charities, a Charity Commission established Common Investment Fund managed by the CFB’s sister organisation Epworth Investment Management Ltd. Details can be found at:

www.epworthinvestment.co.uk/affirmativecorporate/index.php





dilution levygilt Fund0.05% of single priced unit value.

shoRt FiXed inteRest Fund0.10% of single priced unit value.

CoRpoRAte Bond Fund0.55% of single priced unit value.

inFlAtion linked Fund0.20% of single priced unit value.

totAl eXpense RAtio Deducted from distributions before payment.

gilt Fund0.15% (including transaction costs and custody).

shoRt FiXed inteRest Fund0.15% (including transaction costs and custody).

CoRpoRAte Bond Fund0.32% (CFB 0.25%; other expenses 0.07%).

inFlAtion linked Fund0.20% (including transaction costs and custody).


MARket Review• The base rate has remained unchanged at 0.5% since

March 2009. The Bank of England’s £375 bln asset purchase programme ended in November.

• The 3 month deposit began the year at a 49bp premium, peaked at 50bp before falling to end the year at the low point, a discount of 6bp.

• 3 month rates began last March at 0.99%, touched 1.00% before ending the year at the low of 0.44%.

• 12 month rates opened at 1.86%, peaked at 1.87% before closing at 0.78%, the low for the year.

• The Deposit Fund’s average life began the year at 91 days, fell to 90 days before ending the year at the high of 114 days.


CFB Deposit Fund +1.3 +2.0

Bank deposits over £10,000 +0.1 +0.4

I week LIBID less CFB expenses +0.4 +1.2

key FACts As at 28/02/13 29/02/12


Average annual equivalent rate 1.26% 1.26%

Current rate (aer) 1.10% 1.35%

investMent oBJeCtivesTo obtain the higher rates of interest usually available in the London Money Market whilst maintaining the ability to make withdrawals at short notice and with minimal risk of capital loss.

investMent pARAMeteRsMinimum on call or repayable within 5 business days: 10%.

Maximum period of redemption (other than floating rate securities): 24 months.

Maximum period between coupon changes on floating rate securities: 6 months.

Maximum average life of Fund (excluding fixed term arrangements): 180 days.

poRtFolio detAilsThe Fund invests entirely through the Affirmative Deposit Fund for Charities, a Charity Commission established Common Deposit Fund managed by the CFB’s sister organisation, Epworth Investment Management Ltd.

Details of the Affirmative Deposit Fund can be found at:

www.affirmativedepositfund.org.uk

Dealing dates Every business day

Access Immediate

Interest accrual Daily

Distribution dates Last day of every month

totAl eXpense RAtio0.23% (CFB 0.20%; other expenses 0.03%).

deposit Fund

Money MARket deposit RAtes%2.0

1.5

1.0

0.5

0.0

0.0

0.5

1.0

1.5

2.0

1 wk 1 mth 2 mth 3 mth 6 mth 9 mth 1 yr

29 February 2012 28 February 2013


peRFoRMAnCe To 28 February 2013 1 year % 5 years %pa

CFB Property Fund +3.0 -1.7

The comparative index, IPD All Balanced Funds Index is only produced quarterly and therefore no comparative figures for the CFB year are available.

key FACts As at 28/02/13 29/02/12


Price per unit: Sell 57.3p 60.0p Buy 59.2p 62.7p

Distributions for year to 31 December per unit 5.04p 4.74p

Yield (on distribution to 31 December and current buying price) 8.5% 7.6%

investMent oBJeCtivesTo provide capital growth linked to the value of commercial property and to provide a high and growing yield.

investMent pARAMeteRs100% invested through the Property Income Trust for Charities.

poRtFolio detAilsDetails of the Property Income Trust for Charities can be found at:

www.pitch-fund.co.uk

Valuation dates Last day of month

Dealing dates Purchases on 1st day of each month Sales on 1st day of calendar quarter.

totAl eXpense RAtio To avoid double charging no additional expenses are levied.

pRopeRty Fund

AdditionAl Risk wARning The CFB Property Fund is not suitable for investors who might wish to realise their investment at short notice. Units can only be sold on the first working day of each calendar quarter and in extreme circumstances the illiquid nature of the underlying property assets of the Fund may result in unit redemptions being suspended for unspecified periods.

Investors should be aware that the Property Income Trust for Charities, in which the CFB Property Fund invests, is permitted to borrow up to a maximum of 50% loan to value and that the gearing effect of such borrowing significantly increases the risks of investing in the Fund. In adverse conditions capital losses and reductions in income payable to unitholders will be greater than for similar investments held through non-geared funds.


CFB CounCil

RogeR sMith ChAiRMAnChairman of family investment company, following a career in the oil and gas industry and the motor industry. Chairman of Epworth Investment Management Limited.

John sAndFoRdviCe ChAiRMAnA Chartered Accountant and former Audit Partner with KPMG’s Manchester office, with considerable experience of the pensions sector, internal controls and corporate governance. Chairman of the CFB Audit Committee.

gRAhAM BoydGraham is a visiting lecturer at Warwick University and until recently was Policy Strategist and Fund Manager at Gemini Structured Carbon. Former member of advisory group to State of Victoria on Energy Technology Innovation Strategy and Head of Energy and Climate Change Economics at the Department of Business Innovation and Skills.

John giBBonAdviser to a number of pension funds and member of the Investors’ Committee of the Property Income Trust for Charities.

Anne goodMAn Chief Executive of Trustees for Methodist Church Purposes. Articled with Hodgson Impey, then specialised in personal tax at Ernst & Young. Subsequently partner in local practice, dedicated to small businesses and director within charity sector.

sue hAwoRth A qualified accountant with experience in tax and compliance. Previously compliance officer and company secretary for Montagu Private Equity, and CFO for Advantage Capital Limited.

Colin peARson A qualified actuary and former investment manager with AXA Equity & Law. Director of Methodist Ministers’ Pension Trust and Methodist Lay Employees’ Pension Trust. A local preacher in the Ashford Circuit.

Revd JenniFeR potteROne of the Ministers of Wesley’s Chapel since 2002 having previously been the Connexional Team Secretary for International Affairs following a twenty five year teaching career in Zambia and Botswana.

John Reynolds John is a non-executive director of Northern Powergrid and the Water Industry Commission for Scotland. He has had an extensive investment banking career including equity research, corporate finance and principal investment. He served as Chair of the Church of England Ethical Investment Advisory Group for six years.

Revd gRAhAM thoMpsonChair of East Anglia District. Trained in accountancy, former member of the Connexional Allowances Committee and former Director of the Methodist Ministers’ Pension Fund.

teRRy wynnA former member of the European Parliament and President of its Budget Committee. Currently a trustee of both the Trustees for Methodist Church Purposes and Action for Children. Also a Methodist local preacher.

gARRy youngA professional economist with strong focus on economic policy, currently working for the Bank of England. Former winner of The Independent’s Golden Guru award. Methodist Lay Preacher in the Blackheath & Lewisham Circuit.

CounCil MeMBeRsRoger Smith (Chairman) John Sandford MA FCA (Vice Chairman)

Graham Boyd MA (Econ) MPhil John Gibbon Anne Goodman BSc (Econ) Sue Haworth FCCA ATII Colin Pearson MA FIA Revd Jennifer Potter BTh MA MSc John Reynolds OBE MA FEI FIET Revd Graham Thompson Terry Wynn Garry Young BSc (Econ) MSc PhD

Audit CoMMitteeJohn Sandford (Chairman) Sue Haworth

ReMuneRAtion CoMMitteeRoger Smith (Chairman) Garry Young

CFB Appointees to Joint AdvisoRy CoMMittee on the ethiCs oF investMentKeith Aldred Alan Emery Revd Jennifer Potter Bill Seddon Roger Smith

CoMMittees And AdvisoRs

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senioR oFFiCeRsChief Executive Bill Seddon BSc (Econ) ASIP Chief Financial Officer Marina Phillips MSc DChA FCA ACSI Chief Investment Officer Russell Sparkes MA ASIP Senior Fund Manager Miles Askew BA MSc ASIP Senior Fund Manager Stephen Beer BA ASIP Relationship Manager Bill Lane MSc ASIP MCSI

pRoFessionAl AdvisoRsAuditoRsMazars LLP Tower Bridge House St Katharine’s Way London E1W 1DD

soliCitoRsPothecary Witham Weld 70 St George’s Square London SW1V 3RD

BAnkeRsHSBC Bank plc 4/8 Victoria Street Westminster London SW1H 0NE

CustodiAnHSBC Bank plc Institutional Fund Services 8 Canada Square London E14 5HQ

CentRAl FinAnCe BoARd oF the Methodist ChuRCh9 Bonhill Street London EC2A 4PE Telephone 020 7496 3600 Fax 020 7496 3631

Email [email protected] Web www.cfbmethodistchurch.org.uk

tRustees FoR Methodist ChuRCh puRposesCentral Buildings Oldham Street Manchester M1 1JQ Telephone 0161 235 6770 Fax 0161 236 0752

Documents

peRseveRAnCe woRks - CFB