COIF Charity Funds - CCLA

COIF Charities Investment FundReport of the Investment Managerfor the six months ended 30 June 2006StrategyEquities continue to comprise the major part ofthe Fund, accounting for over 82% of the total,the same level as at the start of the year. The assetweightings and transactions within the Fundcontinue to reflect our strategic view that bothequities and property should outperform bondsand cash. Over the course of the half-year therewere sales of both UK equities and bonds andadditions to overseas equities with the mostsignificant increase in weightings being in theUSA.UK interest rates on hold as economy displaysresilienceThe UK economy is demonstrating its resiliencewith current growth not only being slightly abovetrend level but also better balanced asmanufacturing, boosted by buoyant exportmarkets, has offset a slowing in the service sector.Recent inflation numbers have been slightlyahead of target levels due to higher import andenergy costs and the likelihood of a rise in baserates after 11 months of unchanged rates hasincreased. This is despite the housing market,which after a strong start to the year levelled off.The recovery in consumer spending has beenrelatively gentle and there are few signs of asustained rise in wage inflation. Sectorperformance was determined by a number offactors. The best performers were those boostedby takeover activity, such as industrialtransportation or the strength in commodityprices, defensive qualities and demandbackground which benefited mining, utilities andreal estate respectively. The Fund was generallywell placed in theses areas but stock selection insome sectors and an insufficient weighting inmining for much of the period proveddisadvantageous to performance. The continuedoutperformance of the FTSE 250 Index againstthe 100 Index was a further negative factor butthe effect of being excluded from investing in theareas of armaments’ gambling and tobacco, inaccordance with the Fund’s socially responsibleinvestment policies was a positive +0.18%.Against this background the total return of theFund’s UK equities was 5.9% against the 6.1% ofthe FTSE All-Share Index.Overseas equitiesUnderlying portfolio performance within overseasequities was mixed. There was a divergencebetween the relative performance of the US andJapanese portfolios which continue to beconstructed in order to broadly mirror theperformance of their respective indices. The biastowards larger stocks benefited the Japaneseportfolio as medium and smaller sized stockssuffered more in the market sell-off but itcontinued to act as a drag on the performance ofthe Fund’s US equities. The Fund’s relatively lowweighting in the USA, which produced the lowestreturn of the major markets, proved beneficial toperformance. The total return of the Fund’soverseas equities was 0.4% which comparedwith the -1.8% Sterling return of the FTSE World(ex UK) Index.European equities driven higher by domesticeconomic dataStrong corporate earnings growth and improvedsurvey data drove European equity markets tonew highs in April. Unemployment continues toedge lower, albeit from high levels andmanufacturing activity is growing at its fastestpace for almost six years with domestic demandboosting orders. Price pressures are mounting,which is adding to the European Central Bank’sconcern over long-run inflation trends. The policyof monetary tightening is expected to continueand this together with the appreciation of theEuro will depress economic growth rates in theregion. Corporate news flow remains strong butprofit margins, already at historically high levels,are likely to come under pressure fromcommodity prices, interest rates and a slowing ofthe global economy. Portfolio performance hasbeen impacted by an underweight position inutilities, which benefited from takeoverspeculation. Corporate activity, a significantfeature of the period, tended to occur in stocksnot held by the Fund. As a result of these factorsthe total return of the Fund’s European equities,in Sterling terms, produced a return of 4.9%which was exceeded by the 6.3% of the FTSEEurope (ex UK) Index.8