Equity bias thwarts Irish sovereign fund’s returns

Ireland’s €15.5 billion (US$20.6 billion) sovereign wealth fund, the National Pensions Reserve Fund (NPRF), has been highly exposed to the equity market malaise. Kristen Paech examines the fund’s investment strategy and the Government’s recent decision to use the NPRF to finance the recapitalisation of two of Ireland’s
beleaguered banks.

Irish pension funds have suffered heavy losses as a result of their large allocations to equities, and the €15.5 billion (US$20.6 billion) National Pensions Reserve Fund (NPRF is no exception.

The fund, which was established in April 2001 to meet the costs of Ireland’s social welfare and public service pensions from 2025, blamed its first quarter decline of -6.7 per cent on the performance of its equity portfolio.

The equity portfolio accounts for around 57 per cent – or €8.8 billion – of the total portfolio.

During 2008, the NPRF lost more than 30 per cent of its value, and since inception in 2001, its annualised performance has fallen into negative territory, with the return sitting at -0.4 per cent compared with 6 per cent at the end of 2007.

For some years now, Irish pension funds have been slowly diversifying away from their home country bias, reducing their allocations to Irish equities.

According to Mercer’s annual European Asset Allocation Survey, the credit crisis appears to have hastened this trend, with Irish pension fund allocations to equities falling dramatically during 2008, from 67 to 60 per cent.

The Irish Association of Pension Funds (IAPF) put the portion of Irish equities within pension portfolios at just 3.5 per cent of total assets, down from 8.2 per cent at the end of 2007 and 12.4 per cent at the end of 2003.

The NPRF is likewise significantly underweight its benchmark equity holding, although its strategic target of 66 per cent at the end of 2009 suggests the fund will look to rebalance upwards throughout the course of the year.

Since the start of the credit crisis in 2007, the fund has been taking steps to protect its portfolio, directing more into cash and maintaining a “cautious” approach towards equity investment.

The investment strategy is focused on building up a diversified portfolio of equities and other real assets on the basis that real assets will outperform financial assets such as bonds over the fund’s long investment horizon.

While the fund admits that this strategy means it will suffer volatility over certain short-term periods, ultimately its performance will be determined by the long-term growth of the global economy over a 25 to 30 year period, rather than by sharp market movements in response to extreme events.

However, recently the fund was forced to invest outside of its statutory investment policy under direction from the Ministry of Finance, after the Government called on the NPRF to fund the €7 billion recapitalisation of two of Ireland’s
beleaguered banks – Allied Irish Bank and Bank of Ireland.

The move caused the NPRF to reduce its cash balances, which comprised more than 10 per cent of the total fund at the start of 2009, and liquidate its government bond investments to finance the €3.5 billion purchase of Bank of Ireland preference shares needed to recapitalise the bank.

The remainder of the funding will be provided by means of a frontloading of the Exchequer contributions for 2009 and 2010.

A fixed dividend of 8 per cent per annum is payable on the preference shares, which can be repurchased at par up to the fifth anniversary of issue and at 125 per cent of face value thereafter.

Warrants attached to the preference shares give an option to purchase up to 25 per cent of the ordinary share capital of the bank existing on the date of issue of the preference shares. All proceeds from the preference shares will form part of the fund.

Most of the management of the NPRF’s investment mandates are outsourced to specialist managers; however certain mandates are managed internally by the National Treasury Management Agency (NTMA), which acts as the
manager of the fund.

The NTMA manages the fund’s passive bond allocation, its unallocated cash, and the centralised currency overlay program, under which 50 per cent of its foreign currency exposure is hedged.

The manager line up is as follows:

Passive equity

Barclays Global Investors

Bank of Ireland Asset Management/State Street Global Advisors

Index plus funds

US large cap – AIG Global Investment Group

US large cap – Barclays Global Investors

Active equity

Pan Europe – Oechsle International Advisors

Pan Europe – Putnam Investment

Global – RCM

Global – Generation Investment Management

North American Growth – Goldman Sachs Asset Management International

North American Value – Lord, Abbett & Co

North American Enhanced Index – Invesco Asset Management

Japan – Daiwa SB Investments

Pacific Basin – Schroder Investment Management

EAFE Small cap – Acadian Asset Management

EAFE Small cap – Axa Rosenberg Investment Management

Global emerging markets – Alliance Bernstein*

Global emerging markets – Emerging Markets Management*

Global emerging markets – Batterymarch Financial Management

Global emerging markets – Pioneer Investment Management

Global emerging markets – Principal Global Investors (Europe)

*Pooled investment vehicle


Eurozone government – National Treasury Management Agency

Active Eurozone government – Irish Life Investment Managers

Active Eurozone corporate – Deutsche Asset Management


Passive – National Treasury Management Agency

Active funds

Goldman Sachs Asset Management*

JP Morgan Asset Management*

*Pooled investment vehicle

Global tactical asset allocation

Bridgewater Associates