BIAM's position on Elan finally pays off

Current Account: BIAM's response was that it adopted a value-based investment strategy and that, in the long term, that strategy would be vindicated. That was a difficult argument to get across when the market was in the throes of the dotcom boom and so-called "growth stocks" were seen as the new dawn for fund managers.

Bank of Ireland Asset Management's taciturn head of investment Chris Reilly can be forgiven for feeling a bit smug after the recent collapse in the Elan share price.

For years BIAM - an unashamed value investor - has refused to invest in Elan, a policy that is thought to have generated some considerable flak when BIAM made its regular presentations to pension fund trustees. Why didn't BIAM own the biggest stock on the market and did that account for BIAM's less-than-stellar performance in years gone by?

But, now with not a single Elan share on its book, BIAM is immune from the impact the Elan collapse has had on other fund managers, and the strategy seems to have been vindicated. BIAM would not claim that it anticipated the Elan collapse, but its lack of exposure to the pharmaceutical company means that BIAM has a huge advantage over its competitors during the coming year.

Mercer commented last week: "It is clear that exposure to Elan will be a key differentiating factor in the relative performance of Irish active balanced managers for the first quarter of 2002," and estimated that the collapse in Elan shares would cost managers with an average exposure to the stock about 1.5 per cent in relative performance compared to a manager with no Elan holdings.

But for the pension fund management industry, stockbrokers and existing and aspiring Irish public companies in general, the recent events surrounding Elan and AIB pose other major questions.

Mercer said a specific Irish equity weighting within a pension fund portfolio was no longer appropriate, although it did suggest that 5 per cent was "an appropriate neutral allocation" to Irish equities. Currently, Irish equities account for about 18 per cent of Irish managed funds, a proportion that has been steadily declining since the introduction of the euro.

Mercer says that 5 per cent is a reasonable proportion for Irish equities, but some would go further and say that pension funds - at least defined-benefit funds - don't belong in the equity market at all, Irish stocks or overseas.

The argument here is that defined-benefit funds know their liabilities and, as long as those liabilities are secured by stable investments like government bonds, with guaranteed returns, they should not be exposed to the volatility of the equity market.

The Boots pension fund in Britain has already taken the revolutionary step of getting out of equities altogether and there is a real fear that the move by Boots may be followed by others.

For the stockbroking industry grown fat on the commissions from pension fund equity dealings, a large-scale disengagement from equities into bonds is a major threat.

For Irish public companies, a reduction in weighting to 5 per cent by pension funds would be a major loss of investment capital. If even a couple of the major players in the Irish pension fund market decided to get out of equities altogether and into bonds, it would be a huge setback for the Irish stock market.