By Roland Lovstad
Executives of LCMS corporate entities express confidence that well-defined investment policies, expert advice, and advance planning will stay their course on the stormy financial seas of 2008.
Interviewed during mid-October as the U.S. stock market tottered from a week of severe declines, the executives of Concordia Plan Services, the LCMS Foundation, and Lutheran Church Extension Fund said they are keeping a focus on their respective investment objectives.
On its Web site, Concordia Plan Services (CPS) said the Concordia Retirement Plan was in a strong funded position going into these turbulent times and is well situated to weather the storm. CPS manages retirement, health, and disability funds for employees of LCMS congregations, schools, and agencies.
In an interview, CPS President James Sanft emphasized the importance of disciplined processes — from selection of its board of directors, to diversification of assets, to maintaining long-term horizons.
“The disciplined process begins with the LCMS Board of Directors who carefully appoint board members for Concordia Plan Services,” Sanft explained. The Synod Handbook calls for at least four of the 10 lay positions on the board to be filled by individuals with expertise in the design of employee benefit plans and at least four to be filled by individuals with experience in the management of benefit plan investments.
“Policy and procedures keep us in line doing the prudent things. That is not to say it is a carefree situation,” Sanft explained. “For example, our board has demonstrated an increased concern during this time and has instituted regular calls with the chairman of the investment committee and staff in order to stay on top of the situation.”
CPS retains Ennis Knupp, a recognized leader in the area of institutional investing, as an investment adviser assisting the board and staff in establishing investment policies and in selecting fund managers. In addition, CPS retains Towers Perrin, a recognized leader in actuarial and benefit consulting, to assist the board and staff in the valuation of the underlying plan liabilities.
CPS has an investment policy for each of the plans based on their respective purpose and includes guidelines for evaluating investment managers, according to Thomas Neely, CPS senior vice president/chief financial officer and chief investment officer.
“When you make the policies during normal times, you take the emotion out of investing during interesting times like we have had recently,” Neely said.
Workers who participate in the optional Concordia Retirement Savings Plan will likely see a decrease in their account values, Sanft and Neely acknowledged. However, they underscored that downside risks can be mitigated through disciplined savings, proper asset allocation, and focusing on an appropriate time horizon.
With the Concordia Health Plan, Sanft explained that claims are largely paid with contribution dollars that are paid in on a regular basis. The plan does hold certain reserves and surplus, which are invested, so that plan has some exposure to market fluctuations but is much less sensitive. The Concordia Disability Plan also holds funds in reserve, for example, to assure that funds are available to cover the entire time of a disability claim. Given the longer-term nature of the liabilities, these funds are invested more in equities to closely match the inflation associated with the underlying liability, and therefore are more sensitive to changes in the investment environment.
A month ago, the LCMS Foundation placed a message about the financial situation on its Web site. Since then, Rev. Thomas Ries, Foundation president, said, “It’s like a lifetime of history.”
The Foundation has a number of diverse funds that it manages for both individuals and organizations. Some, such as trusts and annuities, provide life income for donors with the remaining balance designated for church ministries. Other funds, such as endowments, generate income for organizations. The Foundation’s board of trustees engages Wilshire Associates as its adviser to help establish investment philosophy and objectives and select managers. Nine outside fund managers oversee a portfolio that includes stocks and bonds, but no real estate.
Donor instruments such as trusts and annuities — through which donors receive income while they are alive and designate the balance to the church — are invested according to the expected lifetimes of the donors.
Endowments — whether owned by the Foundation or other ministries — are managed for income, Ries said. “We work with organizations, depending on their tolerance for aggressive investments.” He added that the Foundation encourages organizations to take a long-term view of spending as well as income and recommends a spending policy of 4 to 4.5 percent of endowment income with any additional income being placed with the principal.
“We evaluate long-term performance to make ourselves feel better,” said Ries, noting that the equity portfolio was up 19 percent when the fiscal year closed June 30, 2007. “But over the long run, markets tend to revert to the mean and we have certainly seen that trend in the 15 months since.”
The downturn has adversely affected the Foundation’s securities lending program, which has generated $1.8 million since 2000. The program involves loaning securities, which fund managers use as collateral for non-Foundation transactions. Ries emphasized that the Foundation’s securities remained “secure” although their value may have declined because of the financial conditions.
Ries also noted that the Foundation’s investment philosophy, which was formulated by the trustees nine years ago, continues to serve as a guide. “It’s not possible to time financial markets. You have to set up a program that is as predictable as possible,” he said.
“In the short run, we are cautiously optimistic,” Ries said. “In the long run we are very optimistic because that is the way it is in investing.”
While the country’s real estate market may be struggling, the Lutheran Church Extension Fund reports that its loans to congregations and other ministries are experiencing normal, favorable repayment with few foreclosures and minimal write-offs. Some paper losses have occurred due to falling real property values, which LCEF expects to recoup as the real estate market recovers in the next few years.
President Merle Freitag said LCEF is in a strong capital position. With $1.8 billion in assets, it has a capital asset ratio slightly below 10 percent. The ratio measures reserves to total assets. LCEF exceeds the 9 percent ratio that is maintained by most commercial banks of similar size.
At the end of August, LCEF ha