Trustees of the Diocesan Investment Trust Report to the 232 nd Diocesan Convention

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1 Trustees of the Report to the 232 nd Diocesan Convention Established and incorporated under Canon 37, the (DIT) is a common trust fund for the purpose of furnishing investments to the Convention and to the Trustees, incorporated or unincorporated, holding funds for the benefit of the missionary, religious, benevolent, charitable or educational purposes of the Diocese, and to any Diocesan Congregation, whether said funds are held as fiduciary or otherwise. As Trustees, we are responsible for the proper management of the Fund, including governance, oversight of the asset allocation, evaluation of performance, assessment of market conditions impacting performance and asset allocation, and oversight of the custodial bank, investment advisor and auditors. As noted above, investments into the DIT can be made by any congregation in our Diocese in addition to any trustee group under the authority of our Diocese. As of December 31, 2015, the DIT consisted of approximately 212 separate accounts belonging to 93 congregations in addition to Diocesan accounts. Its total Net Asset Value was approximately $42.2 million ($46.63 per share; down from $48.80 per share at the end of 2014), with about half of that amount representing Diocesan investments and the other half representing congregational or other trustee group investments. A summary of statistical and performance metrics on the DIT appears on Page 3 of this report. Its 2015 dividend rate of $1.98 per share per year was remained unchanged for Those dividends are paid out (or reinvested if so desired) monthly at a rate of $0.165 per share per month. Canon Phyllis Jones, our CFO, serves as primary liaison with the DIT s custodial bank, BNY Mellon, to process monthly transactions. Redemptions and investments can be processed on any business day of the month. Requests for redemptions and investments must allow for at least two business days to process the transaction. Redemption requests from congregations must be accompanied by a signed vestry resolution or minutes from the vestry meeting at which the withdrawal was approved in order to be processed. Statements of account are sent monthly from BNY Mellon directly to each accountholder at their address of record, and redemption checks when they occur are likewise sent directly to the accountholder. For both congregational and Diocesan governance groups, who depend upon income generated from their investments to supplement pledge and other revenues in their operating budgets, the relative stability of the DIT and the steady, reliable dividends it pays are attractive features of the Fund. At our October quarterly meeting, we determine the dividend rate for the subsequent year. Using a baseline rate of 4.5% based on a total-return distribution policy, the proposed dividend is first calculated on a rolling twelve-quarter average of net asset values. The resulting dividend value, expressed in terms of a dollar value per share per year rather than a percentage of net asset value, is then evaluated against current and expected market conditions and a final decision is reached. Once that dividend is set for the subsequent year, it is rarely if ever adjusted. We find it s that ability to be able to budget knowing that the income stream is dependable that has set the DIT apart from many other investment alternatives and made it a favorite among our congregations. At our quarterly meetings, we review fund performance and an analysis of market conditions with the Fund s investment advisor, 19/19 Investment Counsel (formerly Legg Mason). Mr. Michael Clarke, a principal with the firm has served as the representative in charge of our account for many, many years. With his help, our Board of Trustees continues to monitor and manage the in accordance with its Overview and Investment Process guidelines beginning on Page 4 of this report. Page 1 of 6

2 The annual audit of the DIT for 2014, which once again includes a clean opinion on the Auditor s Report, is included as Financial Exhibit XIV in the Reports to Convention. We ask you to join us in giving thanks for the dedicated and dynamic leadership of our board members: Bishop Stokes (President), Chris McCrudden (Vice-President), Bob McKnight (Treasurer), Bob Ashmun, Chris Daggett, Chuck Knill, Bill Klun, Richard Murphy, and the Oliver Okeke. We are also indebted to Canon Connie White for her invaluable service as our Recording Secretary. Respectfully submitted, Canon Phyllis B. Jones, CFO and staff liaison to the Trustees of the Page 2 of 6

3 Quarter Ending December 31, 2015 Size (000's): $42,162 No. of Participant Accounts: 212 No. of Parishes 93 Current Share Value: $46.63 Total Return % Total Return % Total Return % Total Return % Total Return % Total Return % Total Return % Total Return % Total Return % Total Return % Total Return % Total Return % Performance: Equities S&P500 Last Three Months 4.41% 7.04% Year to Date -1.97% 1.38% Last Twelve Months -1.97% 1.38% Since Inception* (Annualized) 6.49% 4.51% Fixed Income Barclays Index** Last Three Months -0.96% -0.69% Year to Date -0.39% 1.07% Last Twelve Months -0.39% 1.07% Inception to Date 2.90% 2.54% *March 1,2001, when current investment managers were hired **Barclays Intermediate Govt./Credit Index Asset Mix: Amount (000 s) Percent Cash $ 1, % Equities 34, % Fixed Income 3, % Alternative Investments** 1, % Total $ 42, % ** Hedge Funds/Mutal Fund, Venture Capital Fund (Topiary Trust), Commodities as inflation hedge and MLP Fund Page 3 of 6

4 Overview of the Trust and Investment Process History and Purpose - The ( DIT or Trust ) was established in 1944 to professionally manage endowment funds of the Diocese of New Jersey, its constituent congregations and any affiliated entities under their authority. Management and Oversight A Board of Trustees ( Trustees ) consisting of 4 members elected at Diocesan Convention and 4 members appointed by the Board serve for staggered three-year terms. The Bishop is also a Trustee and ultimate head of the Trust. The Trustees are responsible for all decisions relating to investing and establishing the dividend of the Trust assets. The Trustees have engaged a third-party, registered investment advisor to assist in making select asset allocation and individual investment decisions. Investment Objective Our objective as Trustees is to manage the Trust to generate strong returns over long periods of time, to enable the Trust to pay a sustainable dividend to the shareholders, and to continue to grow the value per share of the Trust. We strive to manage the Trust with a steady hand and avoid making decisions in reaction to short-term movements in the market. In What the Trust is invested: The Trust invests in a combination of stocks and bonds, either by acquiring individual stocks and bonds or through investment in stock and bond funds. The Trust generally does not invest in private equity funds but could do so if compelling opportunities were identified. Asset Allocation The Trustees have consistently invested the Trust much more heavily in stocks than bonds to take advantage of the reality that returns from a diversified group of stocks similar to the S&P 500 have been superior to a diversified group of bonds when measured over long periods of time. Historically bonds have not provided sufficient returns necessary to achieve the Trust s objectives of generating strong returns necessary to consistently pay an attractive dividend while growing the share value of the Trust. Liquidity The majority of the investments held by the Trust are in liquid securities (stocks and bonds) that can be sold immediately. In addition, the trust holds a small amount of cash for near-term requirements of the Trust and of member parishes. Volatility While the price of stocks tends to be more volatile (move up and down) more than bonds, over longer periods of times, stocks, and more specifically a Page 4 of 6

5 Overview of the Trust and Investment Process diversified pool of stocks like the S&P 500, have proven to generate positive returns that are superior to a portfolio of bonds. Measuring Performance When we consider the equity (stock) portion of the portfolio, the Trustees evaluate performance against the performance of the S&P 500 Index. When we consider the bond portion of our portfolio, we evaluate our performance against the performance of the Barclay AGG Index. It is our objective to equal or beat our benchmarks over long periods of time. Investment Time Horizon We consider the investment horizon to be similar to that of the church, meaning we are more concerned with how the portfolio performs over long periods of time than with how the portfolio performs over short periods of time. This long-term objective enables us to avoid the pitfalls of trying to outperform the market over short periods of time. Social and Religious Responsibility We acknowledge that because we are investing on behalf of the churches we serve, we have a responsibility to consider the core objectives and behavior of the companies in which we invest. We will consider if a company s mission or corporate behavior substantially conflicts with the mission of the church and we will not invest in such company once identified. This of course is a very imperfect pursuit and open to a broad range of divergent opinions as to how these considerations should be factored into investment decisions. We do our best to make what we collectively believe are appropriate decisions to fairly account for all of our responsibilities as Trustees. Dividend Distribution Policy It is our objective to provide a reliable, sustainable, and growing distribution to the beneficiaries, while continuing to grow the per share value of the Trust over time. Distributions diminish the value per share of the Fund, so we seek to strike an appropriate balance between making distributions and retaining returns to continue growing the value per share. Generally the annual distribution target has been in the range of [4% 4.5%] of the value of the shares as averaged over a four-year rolling period. We tend not to reduce the dividend when share values have declined significantly and have tended not to raise the dividend too quickly when share values have increased significantly. Our objective has been to be a steady manager of the Trust and not to react to short-term movements in share prices. It is our desire to be able to appropriately raise the dividend incrementally as the value of the shares of the portfolio increase in value over long periods of time. Page 5 of 6

6 Overview of the Trust and Investment Process What beneficiaries should expect of the Trustee s decision making? We attempt to invest the Fund with a steady hand. You should expect that in times of great optimism when the market is going up tremendously or in times of great pessimism when the market is declining significantly that we are unlikely to react too differently to either situation. We are long-term investors and we will maintain a steady disposition to the market during good and bad times. We are not attempting to predict peak or trough moments in the market or with individual stocks. We believe such reactions are likely to result in flawed decisions that will reduce our performance over long periods of time. That is not to say that we will not buy and sell individual securities that we think are over or under valued, but we are not going to move large sums in and out of cash or other instruments based on short-term movements in the market. Hedging of Investments The objective of hedging is typically to reduce risk in the portfolio. Risk is commonly defined as a measure of the probability of the values of a portfolio or a stock moving up or down. The challenge with seeking to reduce volatility is that it often has the ultimate effect of reducing the overall returns of the portfolio over the long term. We accept that performance of the Trust will be volatile at times, which is to say that the value might go up or down significantly over time, but we are willing to make this tradeoff for better long term performance to benefit the shareholders. Page 6 of 6