Pension funds balance will shift in favour of Europe

The responsibility of every pension fund manager is to get the best investment return from his portfolio. This is also the case with the private pension fund investor who either alone, or with a financial adviser, has to decide the best mix of funds and investments.

Irish pension funds here have been well-served by the huge growth in the Irish economy and Irish stocks. But a shift away from such high exposure (about 30 to 35 per cent on average) to Irish shares in favour of European ones is inevitable with the onset of EMU. The Irish Association of Pension Fund Managers forecast that the shift was inevitable and for the last few years, has been preparing its members for the changes that were on the way.

Banks, investment companies and life assurers have also been preparing for EMU by creating more dedicated European equity funds and even the introduction of euro tracker bonds, the most recent an EMU member tracker from Hibernian Investment Managers.

The inducements to follow the European equity trail are too keen to ignore, says Mr Dara Fitzgerald, portfolio manager with Hibernian: no foreign currency exchange costs, the flurry of privatisations of European utilities, airlines and other public companies like Deutsche Telecom, Lufthansa, Telecom Italia, France Telecom, more mergers and acquisitions and improving economic indicators like low inflation and interest rates.

There are other "critical trends" that justify supporting EMU equity markets, says Mr Fitzgerald. "European Pension Funds are characterised by their domestic, bond bias upwards of 70 per cent of total assets are invested domestically, and the vast majority of this money is in bonds. Both of these traits are set to disappear over the next few years. Combine this with a looming, under-funded state pension crisis in certain countries like Italy and France which will be resolved by increased private pension provision and the scene is set for convulsive shifts in asset allocation in favour of equities."

He also notes that "the US Mutual Fund revolution is spreading to Europe", with the bulk of European money (the equivalent of £140 billion in 1997 alone) heading into equity funds.

The Irish equity market represents about 1.2 per cent of the EMU equity market. Pooled management funds (by far the biggest under management, representing the pension savings of the majority of Irish workers) has about 3035 per cent of its portfolio in Irish equities and about 10 per cent in European ones. "This mix will reverse as fund managers seek to match their European denominated liabilities with euro assets," says Mr Fitzgerald. Private pension fund holders whether in the form of life assurance pension policies or self-administered schemes should be looking now at the selection of European equity funds and carefully assessing the mixture of countries and assets. Private pensions often tend to be invested in all-for-one managed funds with their mixture of equities, gilts, cash and property and in themselves are usually unsuitable for younger or more aggressive investors; financial advisers tend to put clients into funds with a higher exposure to equities for up to two thirds of their contribution period to accelerate fund growth and then switch them into safer investments (like gilts and cash) to consolidate gains.

Irish managed funds are heavily invested in Irish equities and while this is changing, many pension contributors should not only be switching out of the ubiquitous managed fund to begin with, but taking the opportunity to switch part of their investment into a dedicated European equity fund as well. Institutional pension fund managers in many investment companies will be reversing the current Irish to European fund ratio of 30-35/10 ratio with the advent of EMU. That proportion is probably as good a benchmark for a private pension fund as any.

from foreign exchange transactions.

Equity funds have done very well this year in a period,year, it must be noted when it would have been very hard to lose money. Hibernian, which has a wide selection of specialist funds (and four different fund managers to choose from) have has taken the top two places in the still relatively small (11) selection of Euro and Continental life funds over the past two years. Their Its EuroEquity pension fund one of just six on the market is also ahead of the rest for this year with a return of 32.3 per cent. No one can predict if the recent spectacular returns in equity funds will ever be repeated over the life of a typical pension contribution period, but the arguments in favour of holding Euroshares certainly appear to make fundamental sense. Be sure to take professional, independent advice before you choose any fund manager or make any switches.