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United Methodist pension board focuses on
long term during down market

The financial crisis rocking Wall Street and global markets is impacting the investment portfolio managed by the United Methodist Board of Pension and Health Benefits, though not to the same extent as the broad market averages.
A UMNS photo courtesy of Wikipedia.

A UMNS Report
By Marta W. Aldrich*
Sept. 19, 2008

Pension leaders for The United Methodist Church are assuring participants that their accounts are well-funded through a diverse portfolio of investments, despite losses of $1.5 billion during 2008.

Shaky U.S. and world financial markets have hurt investments of the United Methodist Board of Pension and Health Benefits, the largest faith-based investor in the United States. However, its leaders say the losses are still less than the broad market averages, and they are preaching a "stay-the-course" philosophy to the 74,000 clergy and lay employees participating in their plans.

Chief investment officer David Zellner addresses a January meeting in Fort Worth, Texas.
A UMNS file photo by
Marta W. Aldrich. 

"We recognize and accept the cycles in the market, and right now the markets are down," said David Zellner, chief investment officer for the Evanston, Ill.-based agency.

"But we have a disciplined investment process that we’ve had in place for many years, and we stick with that process. We don’t waver, and we do not panic. We take a very calm approach."

The board’s investments closed at $14.9 billion on Sept. 17—down from $16.8 billion at the close of 2007—then increased to $15.2 billion the following day when the market shot up 400 points. The rest of the decrease in assets in 2008 is due to payment of monthly benefits and regular withdrawals.

This week's seesaw numbers follow another tumultuous week in the financial sector that included the collapse of Lehman Brothers investment bankers and the takeover of Merrill Lynch by Bank of America. They are the latest U.S.-based financial institutions that, during the past year, have failed or teetered on the edge of bankruptcy as a result of losses related to risky home mortgages and loans, as well as other high-risk transactions.

Zellner characterized as "minimal" the board’s losses directly attributable to securities issued by those institutions.

"At the beginning of the week, we had $5 million directly invested in Lehman Brothers, and that $5 million is now probably worth $2 million. Three million dollars is a lot of money but, as a percentage of a $15 billion portfolio, it is relatively small," Zellner said in a Sept. 18 interview with United Methodist News Service.

In all, he said, less than 1 percent of the board’s portfolio was invested in stock issued by Lehman Brothers, mortgage lenders Fannie Mae and Freddie Mac, investment banker Bear Stearns and insurance giant American International Group. All are among Wall Street icons involved in the shakeup.

Zellner emphasized, however, that investments in Fannie Mae and Freddie Mac bonds are safe because the U.S. government has taken over responsibility for those liabilities.

As for AIG, the board suffered some investment losses and is in the process of replacing the insurer with another provider to insure one of the board’s seven investment funds.

Spreading the risk

The United Methodist pension fund ranks among the top 100 pension funds in the United States, according to Crain’s Pension & Investments.

Zellner spoke to UMNS one day after the board posted a question-and-answer report on its Web site about its investment performance in the current market. The report emphasized the board’s diverse portfolio that includes U.S. and international stocks, bonds, real estate securities, inflation-protected bonds, commodities futures contracts, private equity, real estate, privately placed mortgage-backed loans through its Positive Social Purpose investments program and other types of investments.

The greatest losses in the past year have resulted from decreased investor confidence in the U.S. and world economies as a result of the failure of these institutions, causing a steady decline in stock and some bond markets.

“The greatest challenge is assuring participants that we have a disciplined process, that we’re adhering to that process and that they should ignore short-term fluctuations in stock prices.”
–David Zellner
"Because of the loss of confidence in the U.S. financial system, as well as concerns about the decline in the U.S. and world economies, investors have lost confidence in not only corporate America but in corporations around the world that they’ll be able to continue to be as profitable as they have been in the past," Zellner said. "This has had an adverse effect on investor psychology and has resulted in a decline in the value of stock prices for companies."

Zellner said the church’s pension funds are positioned to weather such financial storms, however, because of its "long-term investment philosophy of a measured, balanced, diversified approach to managing investments."

"The greatest challenge is assuring participants that we have a disciplined process, that we’re adhering to that process and that they should ignore short-term fluctuations in stock prices," he said.

He also noted that clergy in the Ministerial Pension Plan (MPP) that are nearing retirement should not be significantly impacted by the latest market fluctuations as MPP balances are managed by the board's LifeStage Investment Management Service. LifeStage places investments with higher risk but the potential for greater return during early years of a participant’s career and reduces exposure to higher-risk equities as retirement approaches. "Although the recent decline in the stock market has had an adverse impact on MPP balances, most participants approaching retirement have a majority of their balances invested in lower-risk, fixed-income funds," the Q&A report states.

Clergy who are a decade or more from retirement will see reductions in the value of their accounts, "but given the amount of time before retirement, there is time to recover those losses," Zellner said.

The board received numerous calls from participants after Lehman Brothers filed for bankruptcy protection on Sept. 15 because the pension agency has about $2 billion in assets managed by Lehman Brothers Asset Management (LBAM). The Q&A explains that LBAM is a subsidiary of Lehman Brothers Holding Co. that is not subject to the bankruptcy filing and that securities managed by LBAM on behalf of the board are held by and under the control of Bank of New York Mellon, custodian of the board’s investments.

"Approximately 60 percent of the securities managed by LBAM for the General Board are safe U.S. government-issued securities," the report states.

Zellner noted that the value of the board’s LBAM assets actually increased on the day when Lehman Brothers collapsed. "That entity is the money management arm, and our participants should rest assured that those assets are safe," he said.

Opportunity amid turmoil

Julianne Malveaux, an economist and president of United Methodist-related Bennett College for Women in Greensboro, N.C., said participants in the denominational pension plan should not panic when they see a reduction in their account balances.

Julianne Malveaux

"I wouldn't be alarmed by what represents a 6 percent loss at a time when some companies are experiencing losses of 30 and 40 percent," she said. "I'd be more alarmed if we don't get on top of this in the longrun by pushing our influence as a socially responsible investor and sharing with our stakeholders what we should be doing around this economy."

Malveaux said the succession of collapses or mergers of some of Wall Street's oldest and biggest firms represents an opportunity for the pension board and other large managers to use their investment muscle to influence public policy and address corporate greed.

"With such financial instability, the question we might want to raise is how we can be a force for stability," she said. "With more than $15 billion, the pension board has an enormous influence to emphasize not only rate of return but also social and economic justice. Investors can change the course of corporate greed," for instance, by advocating against unfair compensation packages, balancing CEO bonuses with assistance to "the least of these" and pushing companies to be environmentally, economically and racially just.

"This is a great time for people to think about where we are and to begin to raise questions. At any shareholder meeting, there should be a United Methodist statement at the table. We need to make sure we're seen as a socially responsible investor that has a vision about what our nation looks like."

The Board of Pension and Health Benefits is an original signer of the United Nations Principles for Responsible Investment. All of its investments are screened according to investment policies adopted by its board of directors in accordance with the Social Principles of The United Methodist Church. These policies exclude investments in companies earning significant revenues from gambling or from the manufacture, sale or distribution of alcoholic beverages, tobacco-related products, pornography or weapons.

*Aldrich is news editor of United Methodist News Service.

News media contact: Marta Aldrich, Nashville, Tenn., (615) 742-5470 or newsdesk@umcom.org.

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