Market faces search for buyers

CURRENT ACCOUNT: It's no secret that Irish pension funds have been reducing their holdings of Irish equities since the introduction of the euro in January 1999. Over that period, some €2 billion worth of Irish equities have been sold by Irish pension funds, as the average weighting of Irish equities has fallen 10 percentage points to the current average of around 17 per cent of total funds.

But, judging by a recent report from Davy's Robbie Kelleher, a further large-scale disengagement from Irish equities by pension funds is inevitable.

If that is the case, it poses serious potential problems for the Irish stock market, the availability of capital to Irish plcs and, not least, for the Irish stockbroking industry.

The question for pension fund trustees is whether their funds - with euro assets to balance euro liabilities - has any business being exposed to the Irish equity market, where recent experience has unfortunately shown that stock- and sector-specific risk is a serious issue.

There is nothing wrong per se in pension funds investing heavily in its own domestic stocks. US and British pension funds have always had a far higher weighting of domestic stocks than Irish pension funds. Irish funds' 26 per cent weighting in domestic stocks at the introduction of the euro was actually low by international standards, but the concentration of the Irish market meant there was a much higher than average stock risk.

At the end of 1998, the average Irish pension fund had a 10 per cent weighting in the two big banks, so it was pretty obvious that any major hiccup in either AIB or Bank of Ireland would have had a seriously destabilising effect on fund valuations.

It is a telling statistic that Irish funds were net sellers of more than €1 billion of Irish shares since the middle of 2000 - a period when the Irish market boomed, heavily outperforming the rest of the Europe. If Irish funds are heavy net sellers during a boom, what will their strategy be when the market is in the doldrums?

Every percentage point reduction in pension fund weighting in Irish equities means net sales of some €700 million. So if pension fund weightings fall to 10 per cent, it would require net sales of some €5 billion, while a 5 per cent weighting would mean pension fund sales of almost €9 billion.

Obviously, it's not in the interests of the pension funds to destabilise the Irish market by getting into a mad rush to unload Irish stocks but the clear message from the Davy report is that the market is going to have to get used to the idea that its previous captive market is disappearing rapidly, and that plcs and their brokers will have to find new non-traditional buyers of their shares.

That will be a hard sell for all but the most highly rated and global stocks.