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Managed funds up over 5p.c. in first 5 months of 1999 Back  
The five month figures just released by Mercer show the growth sectors gaining aswell as cyclical stocks making a comeback. Jennifer Richards examines individual funds and provides the background on current trends
Following on from the roller-coaster returns experienced in 1998, 1999 has brought continued, albeit less extreme, volatility. According to figures just released by Mercer Ltd, Actuaries and Employee Benefit Specialists, as part of their ongoing survey of the investment performance of unit-linked group pension funds managed by professional investors, the average pension fund grew by 5.4% over the first five months of 1999. However, returns in the month of May were negative with the average fund falling 3.4%. Concerns about the US Federal Reserve raising US interest rates seems to be the main driver behind the negative market sentiment in May.

Year to date performance

In 1998 it was the growth sectors such as technology, telecommunications and pharmaceuticals that gave the greatest gains. Financial stocks also benefited from falls in interest rates. This was again true during the first quarter of the year but in the latter two months cyclical stocks began to make a comeback and value managers (such as Bank of Ireland Asset Management and Irish Life Investment Managers) saw good performance within their equity books. Both BIAM and ILIM moved into above average positions for the year to date returns despite being below average at the end of the quarter.

Of the 18 managers in the Mercer survey, New Ireland tops the pole with a five-month return of 8.4% against an average of 5.4%. The New Ireland fund is managed by BIAM but has some asset allocation limits placed on it by New Ireland Assurance Company. This lends credence to the theory that it was BIAM's asset allocation alone that lead to their below average performance, while relative stock selection returns were impressive. Second and third positions in the year to date table are taken by Irish Progressive and Canada Life respectively. Interestingly, Eagle Star are at the bottom of the table for this short-term period.

Longer term performance

Investment returns can be extremely volatile over short periods, and so trustees are generally more interested in longer-term performance. In the three years ended 31st May 1999 Friends First head the table with a return of 23.1% p.a. against an average of 21.4% p.a. and inflation of just 1.8% p.a. ESB Fund Managers rank second with a return of 23.0%p.a. and New Ireland ranking third with a return of 22.9% p.a.

Over the last five years, the average manager returned 18.2%pa. ESB Fund Managers this time are top of the pack returning 20.7% p.a. but they are closely followed by Eagle Star with a return of 20.5% p.a. Third position is taken by Friends First with a return of 19.5%p.a. With inflation at a meagre 2.0% p.a., Irish pension funds continue to show stellar real growth over the medium term.

Asset distributions

The average Irish pension managed fund continues to be primarily invested in equities as over the long term this sector has been shown to outperform all other investments. Typically an Irish balanced fund has between 50% and 80% in equities with the remainder in fixed interest, property and cash. Over the next couple of years we expect to see a reduction in the average holding in Irish equities as investment managers look to the 'Euroland' for more diverse investments within the local currency. To some extent this process started in 1998 as the average pension managed fund's holding in Irish equities fell from 35.4% to 31.9%, despite strong relative Irish Equity appreciation. It was overseas bonds, however, not European equities that benefited from this reduction.

Outlook for 1999

Volatility seems to be the name of the game over the next few months. If the Fed do raise interest rates then we may see a correction in equity markets, however the increase is likely to be small and it could be argued that some portion of this has already been priced into the market. Despite the avoidance of global deflation that was recently feared, a weak Euro, the Kosovo crisis and a continued lack of confidence in the Japanese government seem to indicate that the road ahead may not be as smooth as we had become accustomed to prior to mid 1998.
Stay tuned.

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