How has performance been?
Performance has been pretty good. We have a benchmark which is essentially the market minus the things we are not allowed to invest in, so it is fair from the manager’s point of view. The benchmark for UK equities is the FTSE All Share index, which the UK equities element of the portfolio has outperformed over one, three and five years. For overseas equities the benchmark
is the FTSE World (ex-UK) index which the overseas equities element of the portfolio has outperformed over the last three and five years.
Do you think screening funds is detrimental to returns?
In principle, financial economic theory would say if you restrict yourself like this then your expected return would be similar to the market but with higher volatility. So typically over the medium to long term the main thing you would expect is greater volatility because, taking an example, if energy prices increase the value of oil, gas and coal companies will go up and the value of other
companies will go down, so over that shorter period you would expect us to be hit. But when oil, gas and coal prices go down and the rest of the economy picks up we will do better and the fossil fuels companies’ share prices will go down. So you do need to be prepared to accept a higher level of volatility, but not necessarily a lower level of return over the medium to long term.
How do you control volatility?
This is effectively our ‘rainy day’ fund that we don’t anticipate needing, but have in reserve in order that should the untoward happen we can dip in as necessary. So we do have an eye on liquidity or the ability to get access to at least a substantial proportion of these funds reasonably quickly so we don’t want them to be tied up in highly illiquid stocks or bonds. On the other hand, because we are hoping this rainy day will never come, we hope we are investing for the longer term. So there is quite a tension between in principle trying to have a longterm perspective but at the same time recognising the potential but uncertain need for liquidity. The portfolio has had lower volatility than the benchmark over five years and the exclusion of fossil fuels has certainly been a contributory factor.
Do you have any examples of situations in which you might have to dip into the fund?
Typically we hope income from the fund is more than we need to maintain the real value of the fund, but if there was an exceptional one-off programmatic opportunity that needed funds quickly, but would mean our cash balances become a bit low for comfort, then we might temporarily free up some of the portfolio so our cash balances stay high enough.
How do you monitor your portfolio?
If you say to your equity managers ‘Here is the benchmark, we want you to try and beat it without taking silly risks’ you can’t then say ‘And by the way, we like that and we want this’ because then we are becoming the investment managers. However, there are times the managers will say ‘We are thinking about investing in this, is that ok with you?’ They report to us four times a year on every purchase they have made so we retrospectively get to see what decisions they have made. For example, there was a company that sells some fur products, which is a sensitive area for us and some of our supporters, so we said we would prefer if you did not invest in that. Obviously if it was a huge investment that would swing the performance of the portfolio then we would have to think about whether we make allowances when we looked at performance.
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