The National Pensions Reserve Fund (NPRF) grew by just 4 per cent in 2007, compared to 12 per cent the year before, after a tumultuous year for global financial markets.
However, the National Treasury Management Agency (NTMA), which manages the fund, said it was happy with the performance in light of the stock market turmoil caused by the US subprime crisis and the resulting credit crunch.
"Our big concern was that the fund would end up in negative territory because of the way stock markets have performed around the world," NTMA chief executive Dr Michael Somers said.
The fund, which will be used to meet the cost of social welfare and public sector pensions from 2025 onwards, earned an investment return of €797 million in 2007, a 4.1 per cent gain.
Its market value as of St Stephen's Day was €21.3 billion, compared to €18.9 billion at the end of 2006. The fund's annualised return stands at 6.2 per cent since its inception in April 2001.
In a bad year for equity markets worldwide, the Iseq index of Irish shares suffered considerably more than most, sliding 27 per cent as the housing downturn took the gloss off financial and construction stocks even before the credit crunch did its damage. However, less than 1 per cent of the NPRF's assets are held in Irish equities. Despite the turmoil, the NTMA said the positive performance of the fund was due to growth in its equity portfolio, which accounts for 72.4 per cent of its assets. Its performance was also assisted by the fund's policy of hedging 50 per cent of its exposure to foreign currencies.
The pace of investment in property and private equity under the NPRF slowed down in 2007. This was initially due to a view that there was little room for improvement in credit conditions but was later due to the effects of the credit crunch, as the cost of capital rose and the flow of deals dried up.
"On the other hand, we would be conscious that as markets go down, good value might appear," said Eileen Fitzpatrick, head of alternative assets for the NPRF.
A total of €1.3 billion is held in alternative assets - property, private equity and commodities - but this is just 1.3 per cent of the fund's total assets. The NPRF intends to raise this allocation to 2 per cent by the end of 2009.
The NTMA is evaluating tenders for the fund management of emerging market equities. The new managers will allow the NPRF to increase the proportion of the emerging market stocks that it holds from 2.1 per cent in 2007 to 5 per cent by the end of 2009. Some 80 international investment houses have made an expression of interest and a decision is expected in the next two months.
