This year the average Irish Pension fund peaked in February, and is only now clawing its way back to that level. In the mean-time, it had slumped by about 15% from that peak until it bottomed in early April, recovering all the lost ground.
So year to date the average pension fund is just now edging into the positive, up around 2 or 3%. Funds are grinding out a result
It’s more Brentford than it is Arsenal.
Yet we continually hear of the markets – especially the US stock market – making new highs. The market headlines point to an S&P index up nearly 14% in 2025 so far. In Germany, shares are up close to 20%. In Japan, the Nikkei is ahead by about 13%. But we don’t see this is in the funds.
So a few things.
Making new highs requires only a move of 0.01% in a market, so maybe not to read too much into that. Secondly (and more important) the US stock, market for a European investor so far this year, is up just about 1%. This is because the US dollar has been weak and pulled back returns.
And US stocks matter the most in the average Irish pension fund. An average pension fund today will have just over 70% invested in stocks. The balance will be in other assets like bonds, property cash etc. Of this 70% in stocks, almost 70% is exposed to the US market. So basically half the assets are in US stocks – and in the US dollar. It’s quite a concentration in one asset – and one currency.
Do managers hedge away this currency risk? Some do. Some don’t. Some hedge away a portion of it. And there are years when it doesn’t matter and there are years when it does. It matters in 2025.
So where do we go from here? Future direction in interest rates is key. Consensus thinking is probably that the ECB may pause with rate cuts, while the US Central Bank (with gentle persuasion from the President) may embark on a series of further reductions in interest rates. This might suggest further weakening in the greenback. However the Fed might also hold back on these cuts if it felt that tariff-induced inflation was on the horizon.
Currency forecasts are notoriously tricky, but as we have seen, currency moves can have dramatic impact on fund returns – and ultimately Irish pension funds face liabilities in euros.
Fund investors should look to well-diversified portfolios – diversified over assets but more importantly diversified over risks.
And currency is one of those.
Tradewinds 