COIF Charity Funds - CCLA

COIF Charities Investment Fund
Report of the Investment Manager
for the year ended 31 December 2006
Fund dividend increase exceeds consumer price inflation
The favourable background for income generation has
enabled the Fund to increase its annual dividend in
respect of 2006 from 33.5p to 35.5p per unit. This is a rise
of 6.0%, an increase above the rate of consumer price
inflation for the second year running. The rate of dividend
growth from the Fund’s equity holdings should continue to
be favourable, and it is expected that, in the absence of
unforeseen circumstances, the Fund should again be able
to increase its dividend at a satisfactory rate in 2007.
UK equities deliver strong returns
The UK equity market as measured by the FTSE All-Share
Index rose by 13.2% over the year, recovering strongly
from a major setback in May. The market was supported by
a generally positive economic background, another year
of strong corporate earnings growth and a valuation level
which was modest when compared either with past levels
or those of other markets or asset classes. The progress
occurred in the face of some notable headwinds, notably
an escalating oil price, rises in interest rates as inflationary
pressures increased and the weakness of the US dollar.
The market was underpinned by an acceleration in
corporate activity based on attractive returns on equity, the
availability of relatively cheap finance and generally
strong balance sheets in target companies. This activity
largely took the form of takeover bids, frequently for cash,
from leveraged buyout specialists or overseas corporate
buyers. There were bids for a diverse range of companies
which included AWG, BAA, BOC, Corus, Gallaher and
Scottish Power. Takeover approaches were received by
many other companies and speculation was rife
throughout the market. This high level of corporate activity
together with many large share buy-backs resulted in a
shrinkage of the UK equity market over the year.
The Fund’s UK equities gave a total return over the year of
16.8% - a level identical to that of the FTSE All-Share
Index and ahead of the 14.4% returned by the FTSE 100
Index. During the year the Fund’s ethical investment
policy had a small positive performance impact.
Fund’s overseas equities return boosted by asset
allocation
The returns from the FTSE World (ex UK) Index lagged
behind those of the FTSE All-Share Index. This was due to
the relatively poor performance of US and Japanese
equities and the local currency returns of all major markets
which were lower when translated into Sterling. The COIF
Charities Investment Fund’s overseas equity portfolio was
underweight in US equities, and largely as a result of this
factor the Fund’s overseas equities outperformed the FTSE
World (ex UK) Index, delivering a total return of 8.9%
compared with an index return of 5.6%.
Property returns vastly superior to bonds
Bond yields, which had been driven to low levels as
certain categories of investors were encouraged or forced
to pursue liability matching, rose over the course of the
year as concerns over the trend in inflation and the
resultant increase in interest rates weighed heavily on
sentiment. Total returns from fixed interest markets were
generally lower than those from cash and in the case of
overseas bonds were actually negative. In contrast,
property maintained its recent record of producing
consistently high returns.
The Fund’s bias towards property rather than bonds
(relative to its benchmark) as a means of enhancing
income returns therefore proved highly successful in terms
of overall performance. The Fund continues to hold all of
its direct property investment through the COIF Charities
Property Fund. This Fund benefited from an active
management policy and its weightings and individual
investments in the office and industrial property sectors.
Investment outlook
After the highly positive global economic background and
buoyant equity markets of the last four years 2007 is likely
to be a more challenging year for investment markets
generally. The global economy looks set for a mid-cycle
slowdown but there should still be a satisfactory balance
between growth and inflation. There are some risks to the
inflation outlook and by extension the prospects for bonds.
However, equity valuations remain attractive relative to
bonds, particularly in the UK. The generally undemanding
valuation levels together with a high level of takeover
activity should act as positive supports for equities. Against
this background the COIF Charities Investment Fund’s
strategy is to maintain its emphasis on equity investment.
The fundamental factors that support equities remain firm
but investors should expect more volatility than in recent
years.
Nigel I. Debenham
Fund Manager
CCLA Investment Management Limited
28 February 2007
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