IRELAND - A couple of years on many pension funds may be ruing the day they moved out of Irish equities and into eurozone, given the relative returns.
When Ireland adopted the euro the widening of the domestic equity market to encompass the whole eurozone was widely welcomed - it offered greater investment freedom with no currency risk.
But Irish equities have outperformed their eurozone neighbours spectacularly: over three years the Irish index is down by 9.6% compared with a 22% fall for the eurozone as a whole.
However, a two to three year period is too short a period to judge, according to Tom Murphy at Mercer Investment Consulting.
“At the time of euro entry people who moved out of Irish equities did so for risk reduction reasons.
“They did it based on a 20-year time horizon, not on reducing risk over two to three years.
“A lot of people are saying we shouldn’t have done that. People who did it are happy they did it for the right reasons at the time and I don’t see anyone going back into Irish equities.”
Asset allocations to Irish equities among Irish pension funds have come down from the levels of 30-35% that were common before the euro to around 16% now, a far cry from the 2% level which would represent the weighting of Irish equities in the eurozone.
Gavin Caldwell of KBC Asset Management said: “We have found around 15-16% of the total portfolio in Irish equities is round about the mark. It ensures you don’t have excessive stock specific risk, but at the same time you have got good exposure to quality companies in a part of euroland that is outperforming the rest.”
Investing in Irish equities involves a high degree of stock and sector specific risk given the high weighting - around 50% - of the two banks AIB and Bank of Ireland in the index. Financials as a whole are overrepresented at around 70% of the index.
A recent feature of the Irish market has been its shrinkage, not just for obvious reasons, because companies have delisted for various reasons. Some once big names no longer appear: Eircom was privatised and subsequently bought by a consortium. Smurfit was also taken private. And retailer Arnotts was bought back by the Arnott family.
Valuations of companies had dropped to such a degree that buyouts by private investors became feasible.
Stephen Lalor of Coyle Hamilton talks of the changes in apocalyptic terms: “We may be watching a slow and systematic dismantling of the Irish stock market.”
Still, Caldwell is very upbeat about Irish companies: “We have some very successful companies here that went and stayed public - for example, food companies which have outperformed their European counterparts such as Kerry Group and IAWS.
“These two companies have grown their business and used their quotation successfully. Other well managed companies continue to grow, such as United Drug and Ryanair.”
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