Irish reserve fund to move into new asset classes

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IRELAND - The commissioners responsible for the investment strategy of Ireland’s eight billion euro National Reserve Pension Fund have decided about exposure to additional asset classes apart from equities and bonds.

Donal Geaney, chairman of the commissioners, speaking at the World Pension Association conference in Dublin said: “We have decided in principle to invest in corporate bonds, small-cap equities, public-private partnerships and property.”

Work is currently underway to devise the appropriate entry strategy. The fund is also looking at absolute return models. “We will be looking at how the fund might access these.”

Geaney conceded there had been a lot of debate about the NRPF’s weighting in equities as a result of market performance over the last three years. “To date the fund has only obtained 10% of its projected total income to 2004.” So the fund is well below its targeted exposure to equities, he pointed out.

“A simulation exercise by the NTMA [National Treasury Management_Agency] estimated that equities now purchased by the fund would not have to be liquidated until 2035.”

“For equities to underperform bonds on a 30 year view, it would be necessary to hypothesise a scenario where, over that time period, the return on invested equity capital did not exceed its cost. “Should that scenario come to pass it is hardly likely that the fundamentals of capitalism would have failed. Though this may be remotely possible, the commissioners did not feel it would be sensible to plan for it.”

He hoped future generations would not judge them too harshly for their failure to forecast the end of the capitalist system.

Geaney defended the commissioners’ decision to ‘average-in’ their entry into the investment marketplace in 2002 rather than just “closed their eyes and jump in”.

They took market soundings among a number of strategists who expected the market to rise on average by some 13% in 2002. They decided to delay market entry until the appointed managers were in place and accepted the NTMA’s advice to ‘average-in’ over time. “Over the year we held an average cash balance of one third of the fund’s value, ending the year with 25% in cash.”

This helped to mitigate some of the worst effects of the bear market performance, he said. Since launch in April 2001 the fund had performed “relatively well”, he said compared with the average Irish managed fund with a return of –13.2%.

“The long term nature of the fund positioned it well to cope with bouts of equity market weakness which we will undoubtedly experience many times over its lifetime.”

The commissioners are confident that its long-term strategic weighting of 80% in equities will deliver the optimum return, he said.

“Over the type of long term horizon that the fund operates to, equities must outperform bonds because investors must be rewarded for riskier assets. If they are not rewarded the system collapses.”

The National Pensions Reserve Fund is designed to meet part of the escalating Exchequer costs of social welfare and public service pensions from 2025 onwards. It is managed by the National Pensions Reserve Fund Commission.

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