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Managers’ move from Irish equities gains pace Back  
AIB and Elan share price drops highlight need to minimise stock-specific risk in pension funds and will re-launch pension fund drift away from Irish equities.
Recent share price drops in high profile Irish stocks will accelerate the move away from the volume of Irish equities held in pension funds.
According to several Irish fund managers the decline in share prices of Elan and AIB over the first part of 2002 will again bring into focus the need for Irish managed pension funds to be less domestically focussed, and to be less open to stock-specific risk.
The fund managers were responding to the Finance annual pension survey, which appears in this edition.
Although recent events will naturally filter through into the investment picking decisions - it is a slower process than may be expected and one fund manager indicated that he expected the move to be a drift away from Irish equities rather than a rash of selling.
Tom Murphy, head of Mercer investment consulting believes that a specific allocation to Irish equities is no longer appropriate given that the eurozone is now an Irish investor’s ‘domestic market’. ‘The high allocation to Irish equities in a typical balanced fund is mainly for historical reasons. In the long term, we believe a weighting of five per cent or less is an appropriate neutral allocation to Irish equities.’
However the current level of Irish stocks held in pension funds varies substantially between fund managers - with some averaging as high as 18 per cent. Substantial re-balancing would be needed in order to bring such funds down to a 5 per cent level as Murphy suggests. Three years ago fund managers predicted that the volumes of Irish funds held in pension funds would be closer to 10 per cent by 2002 - so poorly performing doemstic stocks will certainly accelerate the move away from Irish equities.
According to Eugene. Kiernan of Irish Life Investment Managers many Irish pension funds are still open to too much stock-specific risk. ‘There has already been an effective halving in the proportion of an Irish pension fund allocated to the Irish equity market in the last three years. However, as the past few weeks have shown, this still means a fairly high degree of stock specific exposure for pension funds. While we believe that the allocation to Irish equities will, over time, drift down. The key driver will be the relative attractiveness of the major league Irish stocks against, say, their European counter parts. If Ireland can offer a relative value opportunity, it will command a weighting in funds considerably above a strict global index interpretation.
Tim Walsh of AIB Investment Managers agrees with this and says that any further moves to reduce the weighting will have to take account of the relative value of Irish stocks compared to their international peers.
A recent study by Mercer indicates that the value of Irish pension funds has fallen by two per cent for the year to date due to recent falls in Elan and AIB share prices. And the survey says that exposure to Elan will be the key differentiating factor in the relative performance of Irish active balanced managers for the first quarter of 2002.
In the Finance pension fund survey (see page 5) the fund managers forecast that the Irish economy will grow by four per cent this year, three percentage points above predicted growth in the eurozone.

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