Irish pensions funds have come a long way since 1989, when the removal of exchange controls allowed funds and their managers to invest freely abroad. According to Deborah Reidy of investment consultant Mercers in Dublin: Since then, overseas investment has more than tripled from a level of 12% of the total investment portfolio to a current level of around 40%." This was at the expense of holdings in domestic fixed interest and cash sectors.
Over the five years to the end of 1996, the proportion invested in Irish equities also rose from 21% to 24%.The figures just issued by the Irish Association of Pension Funds put the overseas equities at 37% of segregated and at 36% of unitised pensions assets, which contains a small element of personal pensions assets. Recent equity markets have confirmed the wisdom of the decision, and the blistering recent performance of Irish equities has meant similar results domestically.The figures show that the overseas equity distribution has been pretty widely across markets.
Michael McCabe of Bank of Ireland Asset Managers (BIAM) in Dublin says the manager has long been a proponent of the internationalisation of pension fund assets. BIAM reputedly has a 40% share of the assets in the CPMS survey of Irish institutional pensions portfolios, which makes it a very significant if not a dominant player in the pension marketplace. He contrasts its stance with others "who doggedly maintain high weightings in Irish equities".
However, in 1996 the exposure to the equity markets generally decreas-ed with international markets portion falling from 35% to 32%. There were declines in the proportions held in the US, UK, Pacific Basin and other markets, except Continental Europe. At Ulster Bank Investment Managers (UBIM) in Dublin, Sean Hawkshaw says: "One of the largest players has put in place cash positions, which has resulted in the figures changing."
Some managers are responding tactically rather than strategically to current market conditions. McCabe says that BIAM is now "at the cautious end of market". "We would have comparatively high levels of cash. The markets that have performed the strong-est are North America and Europe and we have cut back in these." But the long-term belief in equities as the best place for pensions assets is undiminished, he adds.
At investment manager New Ireland, Michael Dangerfield says there is active discussion between those staying fully invested and those seeing their performance affected by the build-up of cash assets. "We are giving careful consideration to the extent to which we should stayfully invested." Joseph Byrne, with Dublin-based broker and consultant Coyle Hamilton, says he expects the build up of cash in both segregated and unitised portfolios to be a feature of 1997.
Despite the strong performance of Irish equity market in 1996, the proportion in Irish equities has not risen significantly, which would appear to indicate some disinvestment. In Byrne's view funds have been keeping the Irish exposure constant. "Funds have been taking money out and European equities is where it seems to have gone," he says. This is the scenario increasingly being discussed as the prospect of the euro draws near and Ireland's participation in it. New Ireland's Dangerfield says the Irish market is quite small in numbers of issues and in terms of sectors involved. "Inevitably, we see some redistribution of assets by funds." At Mercers, Reidy agrees: "There will be rebalancing within the EMU basket."She expects the move to be sharp and quick. "We expect the level of Irish equities will fall from present levels to 15% by D-day, or shortly after." But Dangerfield reckons it will be gradual: "The change will happen slowly, with new cash flow being directed." Hawkshaw at UBIM says: "I personally do not see a big one-off adjustment." With many Irish companies drawing earnings from overseas activities, they are more diversified and have less Irish content. But he believes that the Irish plcs will have to respond. "There will be more pressure on the Irish companies to produce returns commensurate with the returns of international companies in the same sector, as there will not be that hold on Irish investment managers that they have had in the past."
On the domestic fixed interest side, the convergence play has produced attractive gains for funds. The question now is how much play is there left. Some, but maybe not that much, say some experts. Hawkshaw sees a move to European issues. The extent this happens could well depend on the differential between Irish issues and the Euro benchmark. Some put it 50-70 basis points higher, while others say it will be as low as 15bps. Already IAPF figures show some drift towards overseas issues.
With the strong growth of asset values and positive cash flows, which increased from Ir£663m in 1995 to Ir£895m, Irish funds are in good financial shape. With generally few schemes yet approaching maturity, most defined benefit funds can pursue a real asset strategy. The trend to defined contribution is well under way for new schemes and this is likely to mean a big jump in unitised assets for schemes. So far, the figures for these assets show a generally cautious approach to allocation, which consultants say could result in unsatisfactory investment returns."