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Thursday, 25th April 2024 |
| Pension funds - equity markets in turmoil |
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| Michael Dempsey assesses pension fund performance in the year-to-date and finds that Bank of Ireland Asset Management is the best performing fund manager so far this year. |
It has been a torrid year for investors. Accounting scandals, geo-political risk, economic concerns, and the threat of war are just a number of the more high profile issues that have impacted on financial markets so far this year. And so, as we look back on the performance of pension funds over the course of the year, it makes for some grim reading.
Year to date performance
According to Mercer Investment Consulting, the average pension managed fund fell by 16.9 per cent over the first ten months of the year.
Free-falling equity markets have left their mark. A typical Irish pension fund maintains a weighting in equities of about 65-70 per cent, and with global markets down almost 28 per cent, pension funds have taken a severe beating in the first ten months of the year.
North America and the Eurozone were two of the worst performing equity regions, down almost 30 per cent. However, despite the impact of Elan’s demise on the market, Irish equities have performed reasonably well on a relative basis despite falling 24 per cent.
On a sector level, technology and telecoms are down 44 per cent and 36 per cent respectively in the year-to-date with consumer staples (-6 per cent) and resources (-15 per cent) outperforming.
At October 31st, Bank of Ireland Asset Management (BIAM) topped the Mercer survey with a 10-month return of -10.8 per cent, closely followed by the New Ireland Managed Fund - managed by the same BIAM team - which fell 11.2 per cent over the same period. The under performers were KBC Asset Management (-22.5 per cent) and Ark Life (-21.2 per cent).
The better performing managers over the year-to-date benefited from holding an underweight equity position, while also positioning themselves at stock level towards more defensive areas of the market. The underperforming managers held a high relative weighting in equities and have largely positioned their funds for a strong recovery in equity markets. With equities trending downwards over the course of the year, these managers have borne the brunt of the equity market declines.
The fall-out from a number of specific stocks has also impacted on managers’ performance in the year-to-date. While Enron, Worldcom and Tyco grabbed the international headlines, Elan had the greatest impact on the performance of Irish pension funds. Elan has fallen over 96 per cent in value since the beginning of the year, with its weighting on the ISEQ falling from over 20 per cent to approximately 1 per cent. Managers had various weightings in the stock, from no exposure to almost a full weighting in the stock at the beginning of the year. On average, managers had a 50-60 per cent market weighting in the stock and this has resulted in 1.5 per cent being knocked off the bottom-line performance of pension funds. This fallout has highlighted the stock specific risk issues that are inherent in the Irish stock market.
On a more positive note, equity markets came back strongly in October, with the average pension fund rising 4.7 per cent on the back of this increase. Whether this is an indication that the worst is over and that equities have ‘bottomed out’ will only come to light over the coming weeks and months and is invariably dependent on the ability of the market to hold its nerve.
Longer-term performance
Trustees and members should note however that pension fund investment is long-term in nature. Monies invested today may not be required to pay pensions for perhaps 20 or 30 years and as such, Mercer recommend that more attention is given to longer term returns.
Over the five-year period to 31st October, Montgomery Oppenheim top the survey (+8.6 per centp.a) followed closely by New Ireland (+7.7 per cent p.a.). This compared to an average return of 2.5 per cent per annum from Standard Life and 2.7 per cent from AIBIM who were the under performers over this period. |
Michael Dempsey is a consultant at Mercer Investment Consulting.
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| Article appeared in the November 2002 issue.
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