IRELAND - Ireland's National Pension Reserve Fund (NPRF) has seen its returns for 2010 downgraded by 7 percentage points after the fund's investment committee was forced to write down the value of its stakes in two of the country's troubled banks.

According to the final annual report for 2010 published yesterday, the NPRF's directed investment portfolio - comprising solely of its holdings in Bank of Ireland and Allied Irish Bank (AIB) - lost 25.7%, compared with the 7.9% loss initially reported in January.

As a result, the total fund return for the year was adjusted from a positive return of 4.5% to a loss of 3%.

The discretionary portfolio, comprising the remaining two-thirds of fund assets held outside of AIB and Bank of Ireland shares, returned 11.7% over the same 12 months.

According to the report, the NPRF Commission opted for an independent valuation of preference shares it held in Bank of Ireland and AIB as, unlike its ordinary shares, these had never been listed or traded.

Following the assessment by Davy Corporate Finance, the fund decided to write down the value of preference shares in AIB by 41.5%, while its Bank of Ireland stake lost 20.6% in value.

However, the report said that at least some gains had been made from its bank holdings since the end of 2010, noting that an EU ban on the payment of dividends and coupons for Bank of Ireland holdings expired in January this year.

"On 21 February 2011, the Bank of Ireland paid a dividend in cash of €214.4m with respect to the 2009 preference stock held by the fund," the report said.

NPRF chairman Paul Carty conceded that a "significant portion" of assets had been diverted to assist Ireland's troubled financial sector.

He added: "It is important to note that the fund's policy of global diversification in relatively liquid assets has preserved value and facilitated the application of such large sums to this recapitalisation."

The report further noted that the NPRF had in 2011 seen around two-thirds of its €15bn discretionary portfolio drawn down as part of the Irish government's contribution to the EU/IMF bailout package, leaving it with assets of €5.2bn.

Examining the strategic asset allocation decided on for its discretionary portfolio, the report explained that the new allocation was only partially implemented and that several measures had been delayed.

In several cases it explained that the reduction in the size of the discretionary portfolio had led to the decision to defer the implementation, while "wider fund issues" were also cited.

Most notable was the imbalance in the financial assets portfolio, comprising bonds and cash. While euro-zone corporate and government bonds had a targeted allocation of 6% each, with a further 5% invested in inflation-linked bonds, only 8% were invested in all three asset classes.

In comparison, while 1% cash holdings were proposed, the NPRF instead held 15.2% of assets in cash.