Irish pension funds consolidated the gains made in the first quarter of 2010 with another positive performance over the month of April, as the average managed fund returned 0.9%.  Meanwhile, the government bond market volatility, may hit pension investments, which are already in distress.

Merrion Investment Managers took top spot with a return of 1.5% for the month,  while Aviva Investors propped up the league table with a 0.4% return. Over the first four months of the year, the average managed fund has advanced 6.8%; with returns ranging from a high of 8.3% (Irish Life Investment Managers) to a low of 4.9% (Aviva Investors). Over the past twelve months all of the managed funds surveyed delivered double-digit growth, with the average fund returning 26.3%. Returns for the past year ranged from 30.0% (Irish Life Investment Managers) to 22.4% (AIB Investment Managers).

Fiona Daly, managing director, Rubicon Investment Consulting, commented: "The average managed fund return has been a very disappointing -7.1% per annum over the past three years. However, the five year returns to the end of April are positive, delivering an average return of 2.3% per annum over this period. Irish group pension managed fund returns over the past ten years have been a disappointing 0.5% per annum on average, well below the Irish inflation rate of 2.6% per annum over the same time horizon. Indeed, none of the managed funds surveyed outperformed inflation over this period, while four of the ten funds failed to deliver positive returns over 10 years."

Bond market volatility adds to pension fund distress

Recent events in government bond markets have served to highlight the heightened risks that persist in investment markets generally, despite the strong recovery in equity markets over the last twelve months.

Investment in Eurozone governments’ bonds by pension funds and insurance companies has traditionally been regarded as a secure way to provide for pension scheme or policyholder liabilities.  However, recent events have indicated that all government bonds are not equal as yields on bonds issued by Eurozone governments have diverged significantly. Brian Griffin, who leads Mercer’s investment consulting business in Ireland noted: “Bonds issued by the weaker Eurozone nations have fallen in value as investors demand a higher return on their capital while at the same time German and French government bonds have strengthened (and yields fallen) in response to greater demand”.

These developments have called into question the credit (and country) exposures existing in pension scheme bond portfolios.  Griffin noted that: “A typical Irish pension fund would have up to half of its bond portfolio invested in government bonds issued by Spain, Portugal, Ireland, Greece and Italy.  While previously this would not have caused investors undue concern, recent events have identified the additional volatility and credit risks associated with these bonds markets”.

According to Griffin:“Investors should be reviewing their bond portfolios to ensure they are fit for purpose particularly when these bonds are specifically held to provide a match for pension or policyholder liabilities."

Equity markets continue to post strong performance

The Mercer investment consulting first-quarter 2010 Defined Contribution Universe Summary, published in New York on Wednesday, reported gains in all equity markets during the period. The quarterly report analyzes returns of various funds and helps institutional investors evaluate their mutual fund managers’ performance against other funds and asset class benchmarks.

The S&P 500 Index gained 5.4% during the quarter while the Barclays Capital Aggregate Bond Index posted a gain of 1.8%. Inflation protected securities posted a positive return of 0.6% for the quarter.  International equity markets, as measured by the MSCI EAFE Index, gained 0.9% during the first quarter.

The US equity asset class outperformed international equities for the quarter by 450 basis points (4.5%). Global equities gained 3.2% for the quarter and outperformed international equities by 230 basis points.

Over a 10-year time frame, the S&P 500 Index lost 0.7%, while the Russell 2000 Index gained 3.7%. International equity markets gained 1.3% over a 10-year time frame, outperforming their US counterparts. Over a 10-year period, the fixed income asset class produced a return of 6.3%, significantly above US equity returns (as measured by the S&P 500 Index) over the same time period.