On euro Day, Jan 1st, 1999, assets under management by members of the IAIM amounted to almost £100 billion (€126.97 billion) on behalf of Irish and overseas investors. The critical mass achieved by an industry which has grown from £1 billion in 1974 has positioned it to meet the opportunities presented by the Euro. These opportunities extend to the development of Ireland as a centre for investment management excellence, building on the complementary fund administration and custodian activities in the IFSC.
The introduction of the euro is significant to the industry for a number of reasons. It is the precursor of a true pan-European marketplace in which competitive factors will drive changes in the selection of investment managers by pension funds. It is the catalyst for a fundamental review of the asset distribution strategies of pension funds. And, from the personal investor standpoint, it is the impetus for much increased investment in investment funds.
International competition
The investment management industry has been successful, to date, in maintaining a dominant position in the management of Irish pension fund assets. A number of Irish institutions have also established track records in the management of assets for overseas clients. The industry has scored highly under the main selection criteria used by pension funds. These include quality of people, investment style and approach, processes and historical performance. Given the small size of the Irish market, our investment style and approach has traditionally been focused on global, particularly equity, markets.
This historical exposure to overseas equity markets has given the Irish industry considerable leverage in maintaining its client base. Perhaps most importantly, we score heavily on the basis of historical performance against our main competitors to date - UK fund managers. Some commentators have argued that the historic outperformance by Irish fund managers has been based primarily on their expertise in managing Irish equities. Indeed, the outperformance by the Irish equity market has been considerable and has exceeded that of European equities by 4 per cent a year. But perhaps the focus should be on Irish fund manager's expertise in managing overseas equities (and currency risk) given that about 60 per cent of the world's market capitalisation is outside Euroland. In this context, Irish fund managers have consistently outperformed their UK counterparts in the management of international equities, by approx 1.2 per cent a year since 1984. As investment management emerges in continental Europe as a separate industry to banking and insurance, inter-euro zone competition for pension fund mandates will increase. Internationally accepted standards for performance measurement will be vital in enabling pension fund trustees and consultants to ensure that comparisons between different investment managers are made on an equal and informed basis. The IAIM has taken a lead in this area. The emerging global investment performance standards (GIPS) have been adopted by IAIM members who intend to have them in place from the year 2000, well in advance of the proposed adoption deadlines.
This decision forms part of IAIM's commitment to lead the way in terms of the highest international standards. It should position Irish investment managers to bid successfully for pension fund mandates across the euro zone.
Pension fund changes
What will happen to the asset mix? Conventional wisdom suggests that there will be a major realignment by European fund managers and diversification into euro stocks. From an Irish perspective, conventional wisdom suggests a need to reduce currency and stock-specific risks and that Irish assets must be sold aggressively to get close to Ireland's position as 1-2 per cent of the euro index. What is the reality? It is probably too early to say. There is no doubt that Irish fund managers are overweight in the leading Irish stocks. Stock-specific risk is a very real issue and must be managed carefully. Indeed, this process has been taking place in recent years, as is witnessed by the much increased overseas share ownership of Irish stocks - a very healthy development. However, a headlong rush into euro stocks may not be in the best interests of clients and the long term performance of their pension funds. Irish pension funds are more global than most with around 40 per cent outside the local euro currency, including 15 per cent in the UK and 10 per cent in the US. The euro is not a reason to sell Irish equities at attractive valuations. Neither does there have to be a straight switch from Irish to euro equities. Changes in asset mix should be driven by the pursuit of suitable long term investment opportunities rather than change for the sake of change.
The personal investor
The impact on savings patterns of euro driven low interest rates is already evident. A recently published survey by the IAIM showed that investment funds are the fastest growing segment of the Irish investment market, with net flows of almost £1 billion into investment in 1998.
The value of investment funds has risen by 28 per cent to £10 billion in the past year. This was considerably in excess of that in the post office (estimate, 5 per cnet) and deposits.
The fundamental change in savings habits is being driven by a combination of falling interest rates, increasing disposable income and the strong returns and diversification offered by investment funds. Investment funds are now the vehicle of choice for the personal investor and net flows into these funds are expected to increase by 20 per cent this year.
Ms Ann Fitzgerald is the secretary general of the IAIM
