IRELAND - The National Pension Reserve Fund (NPRF) has grown in value by almost €4bn as it posted a second quarter investment return of 9.4%.

Latest figures from the NPRF - the fund established in April 2001 to go towards meeting the costs of Irish social welfare and public service pensions from 2025 onwards - showed the value of the fund increased from €15.5bn at the end of March to €19.4bn three months later. (See earlier IPE article: NPRF falls to €15.5bn as Q1 returns -6.7%)

The fund now distinguishes between its discretionary portfolio - equating to 63.9% - and its 'directed investments' which are the preference shares in the Bank of Ireland and Allied Irish Bank ordered by the Minister of Finance, and which now account for 36.1% of the total fund.

In the second quarter, the NPRF's discretionary portfolio, valued at €12.4bn, produced an investment return of 12.2% following an improvement in its equity investments as global markets rallied sharply.

However, as the direct investments, valued at €7bn, are "currently held at cost" until the banks declare a dividend to pay the fixed rate of 8% to the NPRF, the investment return on the total fund was therefore 9.4%.

The annualised performance of the NPRF is 0.6% since 2001, compared to around 6.1% at the end of 2007, and a report from the National Treasury Management Agency (NTMA) - appointed as manager of the NPRF until 2011 - blamed the 2008 return of -30.4% for reducing the annualised return.
The asset allocation of the discretionary portfolio at the end of June 2009 comprised 45.2% in large cap equities, 3% in small caps, 2.5% in private equity, and 2.4% in property. It also invested 1.4% in emerging markets equity and 0.3% in commodities and 0.9% in currency and asset allocation funds.

The remainder of the portfolio consisted of 2.4% in cash and just 5.8% in bonds - compared to 21.8% in fixed income in December 2008 - as €4bn of the recapitalisation of the two banks was financed primarily through the use of the NPRF's cash reserves and liquidation of its government bond investments, alongside a "small portion" from equity sales.

The annual report 2008 from the NPRF Commission meanwhile said it will be conducting its scheduled review of its long-term investment strategy throughout 2009 and admitted it will be considering the implications of the financial and economic crisis for the expected risk and return of various asset classes in which it might invest.

Paul Carty, chairman of the Commission, said in his foreword: "Clearly a very significant investment in Irish banks was not something that was envisaged when the Commission first formulated its investment strategy. The Commission has been working on the basis of a five-year planning period and was, in any event, scheduled to conduct a review of its long-term investment strategy in 2009."

He added the forthcoming review will need to take into account both the significant investment in bank preference shares and the tumultuous financial and economic events over the last 18 months, but said "none of these factors involve any change in the date of first drawdown from the Fund - 2025 - and the Commission will continue to make strategic decisions based on a long-term investment horizon".

The annual report also provided an update on the fund's investments in companies with operations in Zimbabwe, following concerns raised by the development agency Progressio Ireland last year. (See earlier IPE articles: NPRF to raise concerns over Zimbabwe investments and NPRF under pressure over Zimbabwe investments)

The Commission said it had asked Hermes Equity Ownership Services (EOS) to engage with a number of companies concerning their activities in Zimbabwe, which had resulted in the discovery some of the companies named either having no involvement at all in the country or are planning to withdraw.

In addition, it said other companies have "small operations providing basic goods which either provide no support to the government or where withdrawal would disproportionately impact the general population" so Hermes had concluded its engagement with these companies.

However, the report admitted: "There are a small number of companies with a larger presence in Zimbabwe. Where these companies are concerned, it is not clear whether advocating their withdrawal from Zimbabwe is the most appropriate course of action. The case for a withdrawal by companies must be weighed against the impact of their pullout on ordinary Zimbabweans who are already facing considerable hardship. Hermes is continuing to engage with these companies."

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