Ireland: Subtle changes needed
The managed fund sector recovered some of its disastrous 2008 losses over the course of last year. Nina Röhrbein assesses the state of play
Irish pension schemes tend to fall in two categories: the ones that manage their assets relative to specific benchmarks - around 55% of all pension funds - and 45% that are more discretionary in the demands they make on their investment managers, according to Michael Butler, investment consultant employee benefits and investments at Willis Risk Services Ireland.
In 2009, Irish pension managed funds received a boost when they generated returns of over 20% for the year. In 2008, they incurred losses of -34.8%.
According to the Hewitt Managed Fund index, an indicator of Irish Pension Managed Fund Performance, they returned 20.7% in 2009 after falling 8% in the first 10 weeks of 2009 (see table). However, the sharp fall of 2008 means that the same index for the last three years remains negative at -8.1%.
The average fund in the survey of 10 managed group pension funds by Rubicon Investment Consulting returned 21.8% for 2009 and -8.2% per annum over the last three years. Over the last decade, Irish group pension managed funds delivered an average of 0.3%, says Rubicon, well below the inflation rate of 2.9% per annum over the same period. In fact, none of the managed funds surveyed outperformed inflation over this period and 40% of funds failed to deliver positive returns at all.
The positive performance of 2009 was mainly the result of the equity recovery from March.
The average managed fund's asset allocation consisted of 70% equities, 17% bonds, 3.5% property and 6.5% cash, with the remainder made up of other asset classes such as alternatives at the end of September 2009, according to Butler.
Some managed funds added new asset classes through 2009. AIBIM's multi-manager managed fund, for example, undertook some euro corporate bond investments. "On top of that, we increased the fund's emerging markets exposure and made sure that by March, when the market turned quite dramatically, we had exposure to cyclical stocks," says Eugene Kiernan, responsible for the multi-manager managed fund at AIB Investment Management.
All sizes of defined contribution (DC) schemes invest in managed funds, according to Fiona Daly, managing director at Rubicon Investment Consulting. "They have these funds at least on their platform, if not as part of their default strategy," she says. "In terms of defined benefit (DB) schemes, it is the smaller end of the market that uses managed funds."
"Irish pension schemes need to be of sufficient size and scale before active asset allocation decisions can be made in earnest," says Brian Delaney, investment consultant at Hewitt. "Some absolute return products have unit or pooled funds available to smaller pension plans but many investment managers focus on segregated asset management and do not provide such structures. Smaller Irish pension funds are excluded from investing in such instances.
"In Ireland today, managed funds are a much less popular investment choice for trustees. The majority of managed funds closely track each other and as such, are quasi-passive investment vehicles. In times of crisis, managed funds have done a very poor job of protecting the assets of the scheme members. In the end, this is what is driving the trend to a much more diversified approach to asset management."
So much so that some of the main providers now offer diversified managed funds, including diversified growth funds, diversified balanced funds and diversified defensive funds.
"Some of these are like managed funds that replace part of the equity content with alternative assets such as hedge funds and private equity, while others are completely moving away from the managed fund model," says Daly.
"The managers are looking at opportunities in equities as well as in up-and-coming areas such as the alternative space to improve diversification and reduce risk," she adds.
"Investors no longer want the one-size-fits-all approach, as they have different aspirations and objectives," agrees Kiernan. "Our multi-manager managed fund will continue to have a balanced exposure. But with scheme members wanting reduced volatility and protection on the downside, we may bring in some more alternative strategies into the fund to broaden the spread of assets appropriately."