Ireland Urged to Use Pension for 'US-Style Stimulus'

Glas Securities has said that Ireland's National Pensions Reserve Fund (NPRF), created in 2001 to pay for future pension liabilities, should consider using its state pension fund to hedge against the impact of a planned budget squeeze.

(October 28, 2010) — Analysts at Glas Securities have said the Irish government should consider using the country’s pension reserves to complete a US-style economic stimulus package.

According to the Dublin-based fixed-income specialists, in order to counter the impact of a planned budget crisis, Ireland should consider tapping its $33 billion state pension for a “US style stimulus.” The National Pensions Reserve Fund (NPRF) already allocates €6.8bn of its assets in a ‘directed portfolio’ comprised of preference shares and ordinary shares in Bank of Ireland and Allied Irish Banks.

“One must question the wisdom of maintaining funds in a ‘deposit account’ when one is finding it difficult to pay ‘the mortgage,’” analysts including Fergal O’Leary at Glas said in a release. “It might be better to re-inject these funds into the economy over the next two years.” The firm added that because of the size of Ireland’s deficit, it is “not well placed” to consider extending the 2014 target agreed with the European Commission. This week, Ireland’s government revealed plans to lower its deficit by seeking $21 billion in spending cuts and tax hikes through 2014, aiming to reduce the deficit to 3% of gross domestic product that year from about 12% this year. Analysts at Glass said a €16bn adjustment is necessary due to the fact that growth will be slower than predicted by the government.

“We question whether the state should reconsider its National Pension Reserve Fund assets and contemplate whether it is best leaving this reserve on deposit for the longer term when there are such question marks over the economy’s ability to deliver in the short-term,” analysts at Glas stated. “We could consider that the remaining €14bn of funds presently invested in the NPRF may be considered variously to aid the economy.”

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Separately, Ireland’s finance minister has been encouraged by some senior advisers to allow the country’s state pension to buy Irish government bonds, Reuters is reporting. An Irish senior official told the news service that no decision to take such action has been made. “That’s an asset that the government has which they can choose to use — it’s there,” the official told Reuters, adding that the power of the $33 billion state pension could encourage other investors to purchase Ireland’s debt.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Northern Trust Shows Strength of Emerging Investment Managers in US Equity Investing

A study by Northern Trust has shown that firms with less than $3.6 billion under management gained 0.67% per year in their active large cap US equity portfolios for the five-year period, a higher return than larger firms or the S&P 500 Index, which was down –0.80% per year over the same period.

(October 27, 2010) — New research by Northern Trust has shown that smaller investment firms can provide improved returns and better downside protection in volatile markets compared to large firms investing in the same asset class.

“We’ve found that smaller boutique firms tend to be more entrepreneurial and performance-driven, and have consequently been able to produce better returns,” John McCareins, senior investment program manager for Northern Trust Global Investments, told aiCIO. He attributed the greater success of emerging investment managers to 1) crisper decision-making 2) flexibility in implementation 3) focus on performance and 4) appropriate alignment of incentives. “An alignment of incentives, a live or die attitude, where the success of the firm depends on performance, is a strong motivator for smaller managers,” McCareins said.

According to Northern Trust’s research — titled “No Contest: Emerging Managers Lap Investment Elephants” — investment firms with less than $3.6 billion under management that collectively manage 1% of all assets in the institutional market outperformed the largest firms and all other groups studied over the five-year period ending June 30, 2010. Additionally, the research showed that the median small manager outperformed the median large firm by 72 basis points per year, which translates to an advantage of more than $7 million on a typical $200 million institutional allocation over five years.

“Our new study indicates that emerging managers may help investors squeeze more out of their most important, and most challenging, asset class,” said Northern Trust’s Ted Krum said in a statement. “Despite market declines and portfolio reallocations, US equities still make up the largest portion of many institutional client accounts, making this asset class a key driver of performance for institutional investors.”

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To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742