Covenant Investment Leaders Reflect on Market Crisis

Post a Comment » Written on October 6th, 2008     
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CHICAGO, IL (October 6, 2008) – Leaders of the Evangelical Covenant Church say their approach to financial and investment management is helping ministries related to the denomination weather the volatility of the current world financial crisis.

Among the leaders are those overseeing the ministries of Covenant Trust Company, Covenant Retirement Communities, National Covenant Properties and the Covenant Pension Plan.

Covenant Trust Company (CTC), which manages funds for individuals, is taking the same approach it recommends to clients. Portfolio manager Gary Johnson says, “That includes emphasizing the importance of maintaining an appropriate balance in our portfolios, based upon client risk tolerance, utilizing a disciplined process of blending asset types in order to control risk and achieve positive returns over time.

“For most clients, our investment time horizon is measured in terms of years, not weeks or months,” Johnson adds. “We understand that adverse market conditions will occur periodically and will negatively impact our portfolios for shorter periods of time.”

As a result, Johnson says, “We do not shift our allocation targets based on short-term movements in markets. We do not attempt to time the markets.”

Johnson also emphasizes that CTC’s investments are diversified. “All of our core mutual fund portfolios are highly diversified in terms of distribution over market segments, industries and individual securities issuers.”

The market downturn is having a negative effect on Covenant Retirement Communities current budget, but President Rick Fisk says they also are taking the long-term approach.

“This has hit us in two primary areas,” he says. Investment income is used to pay overall operating costs, and the rate of return CRC must pay on its variable rate bonds has increased.

Paying the interest on bonds that have funded capital projects has taken additional funds beyond what was budgeted because the variable interest rate has increased significantly, Fisk says.

“It’s not the first time we’ve lived through this,” Fisk adds, referring to multiple economic downturns. “It’s just a matter of how you manage through it.”

Fisk says he understands that may be more difficult for some residents whose major source of income is their investments. Some residents have seen their income drop as much as 25 percent.

As a result, residents fear they will not be able to pay their bills. “That’s a concern I’ve heard from residents repeatedly,” Fisk says.

He expects more will be seeking benevolent funds. Fisk says CRC will do what it can to help residents through the crisis.

Not everyone is experiencing loss, however. National Covenant Properties is enjoying another solid year, says President Steve Dawson. NCP makes construction and real-estate loans to churches.

Dawson says NCP has been consistent in its payments to investors. “NCP has always paid interest and principal on time to investors. NCP has never missed a one.”

That track record has actually caused a number of people dissatisfied with losses in the equity markets to shift their investments to NCP.

“We work hard to match our interest rate exposures by having loans adjust at about the same rate as the investments made by Covenanters,” Dawson says. “As a result, when rates drop, they drop on both sides of our balance sheet.”

Most of NCP’s reserve funds are invested into Agency bonds, and those have shown a market increase over the last year as the “flight to safety” has taken place, Dawson says.

NCP only makes loans to Covenant congregations and entities. “We know our customers,” Dawson says. “I take a great deal of pride that NCP hasn’t had to foreclose on a single customer in its 40-year history.”

Dawson adds, “That doesn’t mean we won’t foreclose if faced with a problem loan – only that we have a history of being able to work out problems with the church. That includes several prior recession periods.

“My biggest concern is the overall economy and its impact on the average churchgoer,” Dawson says. “Eventually, that impacts on their giving to the local church. In the short term, churches can make ends meet. But, over time, if church giving stays down, churches will have to make potentially painful decisions.”

The Covenant Pension Plan (CPP) remains solid despite the market’s plunge, says Dean Lundgren, vice-president of finance.

The CPP is a defined benefit plan, which means that the Covenant Board of Pensions and Benefits is responsible for assuring that investment assets are sufficient to pay retirement benefits to pastors, missionaries and their surviving spouses. “We assume responsibility that not only are benefits paid, but individuals can’t outlive their benefits,” Lundgren says.

The plan is “vastly different” from 401(K) and 403(B) savings programs because the investors assume all the risk in the latter.
“Obviously, in markets where most investment asset classes are facing challenges, our investment portfolio has declined during 2008,” Lundgren says. “However, that decline  has been significantly less than the market indices against which we compare ourselves.”

Diversification and good investment managers have contributed to the better performance relative to other portfolios, Lundgren says. He added that the CPP also invests with an eye toward long-term performance.

“This is very important in an environment such as last month, during which the market – as measured by the S&P 500, – was so volatile,” Lundgren says. During the 21 market days of September, five days saw the market increase by two percent. During six days, the market went down more than two percent.

Lundgren emphasized that, “Timing a large portfolio never works.” He cited a recent newspaper article that looked at the performance of the S&P 500 from 1970 to 2001.

If a person had invested $10,000 and missed just the 90 “best days” – or about one percent of the 8,100 trading days – they would have lost $3,600, Lundgren says. People who did not try to time the market would have seen the investment increase 12.5 times to $125,000.

Lundgren says he is concerned about the rapid decline in the market, but also notes that seven extreme downturns have occurred over the last 20 years. Those include the September 11 terrorist attack, the savings and loan crisis of the early 1990s, and the stock market crash of 1987, when the market fell 23 percent.

“In all instances, the market recovered after these crises, and in most instances, were much stronger after the excesses were corrected,” Lundgren says. From September 2002 to December 2004, the CPP portfolio increased 43 percent in value.

“Obviously, no one knows when markets will reach bottom and turn around,” Lundgren says. “Those of us who are stewards of the Covenant Pension Plan intend to stay the course, continue to invest for the longer term and remain well diversified. As we have done successfully in the past, we also will continue to examine investment options that will generate solid returns and mitigate market risk.”

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