IRELAND - The Irish National Pension Reserve Fund (NPRF) has seen part of its portfolio post negative returns of almost 8% last year, due to the sovereign fund's exposure to the country's ailing banks.

While the NPRF overall saw returns of 4.5%, the €9.5bn stake in Allied Irish Bank (AIB) and Bank of Ireland held in its directed portfolio posted a return of -7.9%.

Under powers granted by the Credit Institutions (Stabilisation) Bill 2010, Brian Lenihan, finance minister, last month ordered a further €3.7bn purchase of AIB shares, in addition to the €5.3bn already spent on holdings in both institutions. The NPRF now holds a 92.8% stake in AIB.

However, the discretionary portfolio, from which €10bn will be taken to finance part of the country's bailout agreement with the European Union and IMF, saw stronger returns on the back of recovering equity markets.

Over 2010, the main portfolio grew by 11.1%, resulting in an annualised return of 3.4% and outperforming both inflation and average managed pension funds in the country.

In a statement, the National Treasury Management Agency (NTMA) said that the total remaining value of the discretionary portfolio, once the agreed bailout sum has been drawn down, would be €4.9bn, from which infrastructure projects and water metering services outlined in the national recovery plan will be financed.

The NTMA, which manages the sovereign fund's assets, said further: "The Credit Institutions (Stabilisation) Act 2010 also provides for Ministerial directions for the Fund to invest in Irish Government securities or for payments to the Exchequer to fund capital expenditure in the financial years 2011, 2012 and 2013."

It added: "The implications of these developments for the Fund's operations and investment strategy are being considered by the NPRF Commission."

At the end of 2010, the NPRF held assets of €24.4bn, up from €22.3bn a year ago and a slight reduction over its third quarter results.