Risky business

CENTS & NONSENSE:Many of the big name Irish fund managers hold a good percentage of their shares in Irish stocks. Maybe they all know something we don't, writes Margaret E Ward.

Little boxes on the hillside. Little boxes made of ticky-tacky. Little boxes on the hillside, little boxes all the same.

WHEN I was a girl, my mother told me that good things came in small packages. As the most vertically challenged in my class until I was about 12, this was not of great comfort when people picked me up and spun me around like a doll.

Her motherly advice also had an unexpected side effect - I became obsessed with little boxes. I shook them, turned them upside down and then sideways searching for a mysterious, wonderful prize. What was in there: sweets, flavoured lipstick, money, concert tickets, keys to a car, jewellery?

I realised this week that small packages are not necessarily a good thing. Irish pensions funds, for example, seem to have consumed the bottle marked "Drink me" from Alice in Wonderland. They just keep shrinking and shrinking. Property values are also under the influence of this strange beverage.

Unfortunately, most pension funds are made up of company shares and property. The people who manage the funds and make choices on our behalf have a duty to ensure that their fund's objectives are met. So, if you are a conservative investor, your fund is probably more heavily invested in lower risk shares with some bonds and cash thrown in.

Getting the right investment mix shouldn't be too difficult for professional pension fund managers in Ireland because they have an entire world of international shares and funds from which to choose. Strangely, many limit their choices through a slavish devotion to anything that says "Made in Ireland".

This is a big, big problem for almost anyone with an Irish pension fund. Why? Small stock markets are like rural villages. There are very few people living there, everyone knows your business and the community thrives on gossip, innuendo and scandal. Individuals with power and money play golf together, go to matches, attend parties with their spouses and meet at the same local watering hole. Deals are done face-to-face with people you know. There's nothing wrong with that, right? It's human nature and the way things have been for centuries. The difficulty is that size matters when it comes to investing and your old age savings are at stake.

Irish fund managers' loyalty to domestic shares is terribly misplaced. The Dublin stock market is tiny and just a few shares determine its overall value. Financial companies dominate the list. Bank stocks represent an incredible 40 per cent of the market's value. So, if one of these companies experiences a huge surge or a big drop in prices, it disproportionately affects the entire market's value.

This potential for volatility makes our stock market a risky place to invest a pension.

Even so, a recent publication from Mercer found that many of the big name Irish fund managers held a good percentage of their shares in Irish stocks: AIB Investment Managers managed fund had 14.3 per cent, Irish Life managed fund 14.9 per cent, New Ireland 16.5 per cent, KBC Asset Managers managed fund 17.6 per cent and Bank of Ireland Asset Managers managed fund 17.9 per cent. The Davy Exempt managed fund invested almost a quarter of its entire funds (24.3 per cent) in the Irish stock market.

Maybe they all know something we don't. Maybe they know something international managers don't know. In the rest of the euro zone, managers try to invest no more than 1 per cent of their funds on the Irish market due to its high-risk status. Or maybe, the Irish fund managers just know the people who run the companies in which they invest and they're comfortable with that.

Of course, some of the financial companies own the fund management businesses, so the managers probably know one another really well. Maybe they even eat in the private canteen together and talk about your pension fund or their bonuses.

Almost € 7 billion in pension savings are invested in the Irish stock market. That's our money. It's incredibly important to our future. We need that cash when we can no longer work and we've run out of time to make more.

Packing such an essential investment into a big box marked "Fragile: Ireland" is probably not a good idea, given the current economic environment. It might be time for our pension fund managers to find profit in more securely constructed little boxes.

I'll leave the final word to Alice's creator, Lewis Carroll: "Soon her eye fell on a little glass box that was lying under the table: she opened it and found in it a very small cake, on which the words 'EAT ME' were beautifully marked in currants. 'Well, I'll eat it,' said Alice, 'and if it makes me grow larger, I can reach the key; and if it makes me grow smaller, I can creep under the door; so either way I'll get into the garden, and I don't care which happens!' "

Margaret E. Ward is a journalist and a director of Clear Ink, the clear English specialists.