Church Pension Group

“A great venture of vision and faith" was the description of the Church Pension Fund used by its fourth President, Bob Robinson. The Fund was established in 1914 under the leadership of Bishop William Lawrence of Massachusetts (pictured on the cover) after many years of preparatory work.

Appalled by the inefficiency and degradation of charitable support, which was all that was available to assist in the support of retired or disabled clergy and their families, he decided to introduce a funded structure. For financial guidance, he turned to J. Pierpont Morgan, who became an important contributor to what became an $8.8 million fund-raising program. Morgan managed those assets and became the Fund's first Treasurer.

The Church Pension Fund thus became one of the first funded pension plans in the country. This early melding of vision and faith, of striving and caring, has been the enduring strength of the Fund.

Five generations of executives and many Board iterations followed Bishop Lawrence and J. Pierpont Morgan. They dealt with economic depression, war, market upheaval, inflation, funding shortfalls and technological revolution as well as many changes in the Episcopal Church. They bravely invested in common stocks in the 1930s and more seriously in the 1950s. Another revolutionary investment change began in 1992.

Prior to that year, the Fund assets had been comprised solely of domestic and non-U.S. stocks and fixed income. There were only two investment managers responsible for the Fund’s $2 billion in assets. Alan F. Blanchard, the Fund’s fifth chief executive, engaged Cambridge Associates to review the Fund’s objectives and its portfolio composition.

Out of this study came a recommendation to broadly diversify the Fund’s assets with the objective of enhancing returns while reducing risk through a more diversified asset mix. Under the leadership of Bishop William Beckham and Sam Pryor, the Investment Committee and Board approved the recommendation despite some trepidation.

There was great conviction by Blanchard, Beckham, Pryor, and the person chosen to lead the strategy implementation, Hiram Moody, that the timing for investment in alternatives, especially venture capital, buyouts and real estate, was unusually propitious.

Diversification

Current Asset Allocation

The diversification program began in November 1992 with the objective of 10% in private equity and 10% in real estate and inflation hedging assets. Through September 30, 2006, $1.2 billion had been invested in private equity. Distributions aggregated $2.8 billion with a remaining value of the investments of $500 million. The resulting internal rate of return was 65% annually.

This extraordinary performance reflected the timing of the investments made, the accessibility of the top quartile general partners selected, the focus on early-stage technology, and the concentration of general partners.

Equally important was the decision in late 1999 to liquidate all equity distributions immediately upon receipt and reinvest them across the Fund's broadly diversified portfolio. This reflected our concern over the level of speculation in public technology stocks and the preponderance of technology stocks in the distributions that we received.

The success of the private equity portfolio proved to be a transforming event for the Fund, as assets soared from $4.1 billion at March 1999 to $6.4 billion at March 2000. One of our general partners remarked at that time that his greatest satisfaction was the money that he made for some great charitable organizations, a contribution greatly exceeding what he could have afforded personally, as successful as he had become.

The private equity portfolio was initially focused on U.S. investments. Beginning in 1996, commitments have been made outside the U.S. These commitments were initially focused in Europe and Israel and later expanded to Asia. During 2006, more than one-third of the commitments were for non-U.S. investments.

The real estate/inflation hedge portfolio never attained the performance heights of the private equity portfolio, nor was it ever expected to. It did provide a very attractive average annual return of 15.4% from its inception in 1992 through September 30, 2006, and has been the Fund's best-performing asset class so far this decade.

In the early years of our real estate investing, it was necessary to work closely with other knowledgeable investors to convince proven real estate managers to found general partnerships in which we could invest. This was necessary because the then-existing real estate funds had proved ill-suited to a down cycle in real estate and operated with economic terms unfavorable to investors.

While this is no longer the case, the Fund has continued to be an innovator, under the leadership of Alan Snoddy, through its search for niche investments around the world as well as domestically. During 2006, more than 40% of our real estate commitments were made outside the U.S.

In addition to private equity and real estate, we were early investors in marketable alternatives such as hedge funds and absolute return strategies. These, which we refer to as Specialized Strategies, represent 10% of Fund assets and include distressed debt and merger arbitrage in addition to hedge funds. Many of these strategies include non-U.S. investments. In total, alternatives represent more than 38% of our equity assets.

Investment Relationships

From our early investing in private equity, real estate, and other alternatives, we developed manager selection criteria for public managers and general partners which remain important to us today. These are:

• The manager should have a record of achievement in a focused investment activity.
• The manager's investment process should have provided clear economic advantage in the past and be a credible basis for assuming economic advantage in the future.
• Assets under management should be small enough to allow unfettered execution of investment strategy, but large enough to provide organizational stability.
• Having us as an investor must be highly desirable to the manager so that we are able to establish excellent working relationships with its senior investment professionals.
• The economic terms must be such that our interests are aligned as closely as possible with the manager.

We believe our responsibility to our managers and general partners is to be fair, informed, and patient long term investors. We are inquisitive and actively involved but not intrusive, and participate on many advisory boards.

We expect our managers and general partners to share these same partnership values and work closely with us in assuring attractive benefits for the retired clergy through a successful investment program.

While we rely on the insights of our managers, the ultimate responsibility for asset allocation decisions rests with the staff and Investment Committee in consultation with Cambridge Associates. While we do not engage in active market timing, but instead rely on periodic rebalancing, we seek to take advantage of investment opportunities created by market anomalies.

Some examples include a significant shift to value stocks in 2000, the timely purchase of Treasury Inflation Protection Securities in 2000, the tactical purchase of non-dollar sovereign bonds in 2003, and an increase in non-U.S. developed and emerging market stocks in 2003. The theme of global investing has extended to private investments, with a significant percentage of new commitments to both private equity and real estate being made outside the U.S. We have been pioneering investors in urban real estate before most investors recognized its compelling economics.

We have even shown that significant value can be added to a fixed income portfolio by being opportunistic and having the right selection of managers. In addition to the staff, Cambridge Associates continues to advise and stimulate. In his retirement, its longtime lead consultant for the Church Pension Fund, Troy Murray, has joined Hiram Moody as eminence gris with the entire attendant powers of that position.

All of us care deeply about the retired clergy whom we serve. Since 1992, they have had nearly $2.2 billion committed to benefit enhancements on their behalf. It is likely that further increases will be implemented based on the continuing success of the investment program. We also care about how we are perceived as investors by our managers and general partners, and are appropriately supportive of them.

We are patient investors, and we have the financial strength, diversified portfolio, and Board commitment to be long term investors. More importantly, we understand that the continued success of this great venture of vision and faith is built on a mutually shared passion for investing and the diligence and intelligence of our partners in this effort--our managers and general partners.

*The Church Pension Fund was saddened by the passing of Bishop Beckham in 2005 and Bishop Thompson in 2006. They were both prior members of the Investment Committee in addition to serving as Chair of the CPF Board. While not investment professionals, their steadfastness and commitment to the highest fiduciary standards served the Fund well. Bishop Beckham was especially instrumental in the decision in the early 1990s to pursue alternatives at a time when it was decidedly not conventional thinking, especially for a church pension fund. Without his strong support, the Fund would not be in the very strong financial condition it is today.

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