The attempt by the Jefferson Smurfit Group and others to plead for the new State pension fund to invest heavily in Irish shares will put a needed focus on the composition of that fund.
The fund has already more than £5 billion (#6.4 billion) deposited in various international banks, which will tax the minds of the seven commissioners soon to be appointed by Minister for Finance, Mr McCreevy. When the new board has set the parameters for the fund, the crucial tendering system will follow. Some informed sources suggest as many as 1,000 institutions will jockey for a piece of the action.
It is a prize worth going after; on top of the existing £5 billion, there will be a further #1 billion per annum, with the top-up continuing for 25 years.
The Smurfit representation is understood to have been to the Department of Enterprise, Trade and Employment. If the possible scenario painted by Smurfit becomes a reality, it could have serious implications for the Republic's stock market.
The company noted that the proportion of shares in all Irish companies held by institutions in the Republic d declined from around 35 per cent in January 1999 to around 20 per cent now. Smurfit has a vested interest in noting this decline, as institutions in the Republic held about 60 per cent of Smurfit shares in 1995. That has fallen to 26 per cent, although some of this decline was due to the group's push to have greater exposure to international shareholders.
With institutions in the Republic reducing their exposure in favour of shares in the non-Irish euro zone, this downward trend has been well flagged. But Smurfit poses the following scenario: if the weighting were to go down to 1.3 per cent (the Republic's weighting in the euro zone), then the Irish portfolio of institutions in the Republic would fall to a mere #400 million, compared with #15 billion. That bleak scenario is unlikely to happen quickly, but it could be influenced by the managers of the new fund. It is ironic that many institutions in the State lost out last year because of their disinvestment policy. The latest figures on the performance of Irish group managed funds, published by employee benefits consultants Becketts, is revealing. The 17 investment mangers showed a median growth of 1.3 per cent in 2000, contrasting with 18 per cent in 1999 and 20 per cent in 1998.
That poor performance of Irish pension funds is confirmed by the larger Mercer combined performance measurement service. It shows the average return at 2.6 per cent in 2000 for 200 funds with a combined asset base of £22 billion.
These performances contrast with the Republic's market, which, despite the sale by Irish institutions, rose by 14 per cent. Their performance would obviously have been better with a greater exposure to the Irish market. A breakdown of the pension funds' assets shows only 20.2 per cent in the State; 50.8 per cent was in overseas equities. The Mercer breakdown of the assets shows 19.5 per cent in the domestic market, 15.4 per cent in the rest of the euro zone, 3.8 per cent in the rest of Europe, 15.3 per cent in North America and 3 per cent in Japan.
The overall performance of the Republic's funds appears healthy, compared with declines in the non-Irish markets. The small overall growth compares favourably with the declines in overseas markets, though five of the 17 funds had negative growth. Also, the performance of pension funds has to be judged over longer periods and, taking a 10-year period, the 15.3 per cent median growth was good. While institutions in the State will continue to reduce their holdings of Irish shares, there has not been a corresponding capital inflow from other euro zone countries. The Budget row will hardly encourage euro zone fund managers to invest here and, as the Irish market represents a mere crumb of the euro zone markets, they would have to be encouraged to do so.
Up to now, the disinvestment in the domestic market has been managed to ensure the market does not crumble. The fear now is that the proportion of the State pension fund's assets invested in Irish equities may become the benchmark for Irish allocation generally. If the Morgan Stanley Capital International index, which has a weighting of about 0.5 per cent for the domestic market, were used and if institutional investors were to follow this quickly, then the market could indeed be badly hit.
Despite Smurfit's dismal performance over the past decade, its arguments need to be considered. Nevertheless, the fund's priority has to be on maximising returns without undue risks. There will be strong pressure for the constituents of the fund to be in index-tracking mode. However, a proportion of the fund should be allocated to active, hands-on investment management. As the bulk of the investment will be in international stocks, the investment management is likely to be vested in some of the larger international players, with the domestic operators largely losing out. But the fund's performance will rightly come under particular scrutiny. The chairman will face the Public Accounts Committee once a year, which should ensure good governance and accountability.
bmurdoch@irish-times.ie
