Consultants’ eye view
Fund managers presiding over balanced funds may still rule the roost in Ireland, but a growing disillusion with the inconsistent performance most give is luring pension funds to pastures new, consultants say.
The asset management arms of the two largest banks in Ireland – Allied Irish Bank Investment Managment and Bank of Ireland Asset Management – and Ulster Bank Investment Management together manage more than 70% of the pension fund universe.
Bank of Ireland alone manages nearly 40%, but its performance has been disappointing of late, says Philip Shier of consultant Delaney Bacon & Woodrow. He attributes this relative underperformance to a US strategy that has proved too defensive. But things may be looking up. Consultants say Bank of Ireland lost clients in 1998 year but gained last year.
AIBIM, described as BIAM’s mirror image, has made certain personnel changes in the last couple of years, says Shier, and this has improved performance.
“Ulster Bank went through a rocky patch in 1995, but since personnel changes, it has been one of the most consistent performers,” says Shier.
Heading the league tables almost consistently since its inception in 1990 has been Eagle Star, say consultants. However, very recently, performance has dropped off, says Shier. “They took the wrong view on the euro against the US dollar, and hedged their exposure the wrong way,” he says.
Consulting actuary Paddy Maher believes there could be risks inherent in Eagle Star’s strategy. It is likely to have a higher risk-reward profile than other managers, making more use of derivative instruments, he says.
Friends First has been winning new business recently. First, the investment arm of Friends Provident in Ireland, has been picking up quite a bit of market share, says Shier.
However, Standard Life has been much too bearish in the market over the past 18 months, he says, although in the long term, particularly its equities record has been good.
Consensus funds have been gaining popularity as an investment medium among Irish pension funds, with Irish Life leading the way. Trustees of defined contribution schemes in particular have favoured consensus funds, say consultants, and there are now five providers of passive funds in the market – Irish Life, Canada Life, Friends First, Norwich Union and, most recently, BIAM.
Consensus funds have brought Irish Life back to the front of the investment stage. Having lost a lot of active business because of a few years of bad performance, the manager has been gaining overall because of the popularity of consensus funds, consultants say.
“Popularity of fund managers seems to go in cycles, traditionally,” says Evelyn Ryder of Watson Wyatt. “It depends whether they are growth or value managers. Irish Life was a value manager, and this is why it did badly,” she says.
Maher says he believes investment performance is random anyway. “If you are going to index, then at that stage it becomes a commodity, so cost become very much the key factor,” he says.
And it is only a matter of time before foreign fund managers enter the fray. At the moment, overseas managers look after just over 6.5% of Irish pension fund assets. But now that Ireland is part of the single-currency zone within Europe, an investment rebalancing is taking place. Already, some fund managers from outside Ireland have come in on a specialist mandate such as global equities.
“I think the local managers are not just competing against themselves, but they need to be looking over their shoulders too,” says Shier.
It is this disappointment with traditional balanced management which has led to an increase in curiosity about specialist management, says Deborah Reidy of Mercer. “Trustees are looking for something which will provide stable performance in the future,” she says.
In the past, Irish fund managers have made large asset allocation calls which have simply not worked. “Most managers are not good at everything – you take away some of the variables when you use a specialist,” she says.
However, since a fund has to be a certain size to consider specialist mandates, the vast majority of funds have always been balanced.
As the international players move in, will Ireland’s asset managers cast their nets wider? Although they are not as yet taking in significant volumes of business from foreign pension funds, some Irish fund managers have done a good job winning an international profile, says Reidy, citing the Bank of Ireland, AIB, Ulster Bank, Irish Life, and Standard Life.