| Average Irish pension fund returned over 15 per cent in Q3 |
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| After a number of years of poor performance, Irish pension funds are regaining lost ground, with the third quarter of 2005 particularly strong, writes Fiona Daly, with the average fund returning 15.8 per cent in the first nine months of this year. |
In the early years of the 21st century, pension funds saw massive surpluses become large deficits over a few short months, as equity markets suffered a series of catastrophes. The first of these was the bursting of the technology bubble in March 2000. Equities continued to fall as a number of large companies were revealed to have committed accountancy frauds. The terrorist attacks in New York, Washington and Pennsylvania in September 2001, and the consequent hostilities in Afghanistan and Iraq, led markets further downwards. It was only with the official announcement of the end of hostilities in Iraq in March 2003 that equity markets finally began to recover from the worst and longest bear market in recent history.
Since then, equities have regained much of the ground lost during this three-year downturn. The third quarter of 2005 was particularly strong. Group pension managed funds produced positive returns during the third quarter of 2005 with the average fund returning 5.8 per cent. In the first nine months of the year, the average fund return was 15.8 per cent, while over the past twelve months managed funds have returned 21.5 per cent on average. Over the three years to 30th September 2005 the average fund return has been 13.7 per cent per annum. In the five-year period ended 30th September pension managed funds have, on average, returned a disappointing 1.2 per cent p.a. However, the ten year period to the end of September saw an average return of 9.9 per cent per annum.
During the third quarter the best performing fund was that of Montgomery Oppenheim which returned 6.9 per cent, while Bank of Ireland Asset Management propped up the table with a disappointing 2.8 per cent. Over the first nine months of the year, Setanta Asset Management’s managed fund returned 18.1 per cent, while in the twelve months to 30th September Eagle Star’s balanced fund tops the performance table. While BIAM have underperformed their peers over these periods, they have the best and third best performing fund over 5 and 10 years respectively to the end of September 2005. This variation in performance highlights how difficult it is to find an investment manager that can consistently outperform in all market conditions. It also draws attention to the danger of focusing on short term performance when selecting an investment manager, as two years ago BIAM were top of the league table over almost all periods. When considering the performance of investment managers, it should be borne in mind that the investment horizon of most pension schemes is substantially more than five, ten or even twenty years.
During the third quarter of 2005, equity markets performed strongly. All of the major equity markets produced positive returns, with the weakening of the euro relative the dollar boosting the return on North American assets to Irish investors. Despite the terrorist attacks in London on the 7th of July, equity markets rose during the month (compounding positive returns achieved in May and June) benefiting from optimism over economic growth, combined with a strong second quarter earnings results season. News that China had removed the Renminbi’s dollar peg was welcomed by markets, even though the extent of the actual revaluation was just 2 per cent. August saw markets fall back slightly, mainly due to concerns over the rising price of oil and the impact of Hurricane Katrina in the US. However, this negative sentiment was short lived, as markets rallied strongly in September.
While rising over 4 per cent, the US equity market underperformed the other major bourses. The Federal Reserve raised interest rates twice during the quarter, two major airlines filed for bankruptcy, and the oil refining region of the Gulf Coast was hit by two of the worst hurricanes in recent history. However, corporate earnings were strong, takeover activity was lively and consumer confidence remains stable. Furthermore, the negative impact on the economy of the reduction in oil refining capacity appears to have been offset by the positive boost to the construction sector resulting from the destruction in the Gulf Coast.
European markets also had a strong quarter. In the UK, the Bank of England cut interest rates which boosted the market despite weak economic and consumer confidence data. The market was also helped by its heavy exposure towards commodities (in addition to rising oil prices, gold and copper prices reached record levels during the quarter). On the Continent, the inconclusive German election result and the impact on insurers of floods in Central Europe, combined with losses in the US Gulf Coast, were detrimental. However, strong company earnings, continued corporate activity and rising business confidence figures supported markets. In Ireland, the ISEQ rose 5.1 per cent over the quarter, despite mixed earnings results.
While the improvement in equity markets over the past 21⁄2 years has been beneficial for pension funds, continuing historically low bond yields are keeping pension fund liabilities at unprecedented highs. Therefore pension fund deficits remain a significant concern, especially following the introduction of new accounting standards which mean that companies need to show the pension fund deficit on their balance sheets. Although many economic indicators imply that bond yields should rise from current levels, other market factors appear to be overriding these and it is difficult to predict when and if bond yields will rise. Going forward, the trustees and sponsors of pension schemes must hope that equity markets and bond yields will rise significantly. This must happen if schemes are to return to the good old days when the biggest challenge was to avoid exceeding Revenue limits on the level of surplus maintained within a fund. However, the likelihood of this happening anytime soon appears remote. |
Fiona Daly is managing director of Rubicon Investment Consulting
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| Article appeared in the November 2005 issue.
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