Portfolio Manager Commentary

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The New Ireland Fund, Inc. Portfolio Manager Commentary Quarter Ending October 31, 2017

Performance Review

The New Ireland Fund Inc.’s ("Fund" or "IRL") returns are summarized in the table below.

  Period to October 31, 20171

Benchmark* Return

IRL NAV Return

IRL NAV Relative to Benchmark





  Fiscal Year to date




  Calendar Year to date




  1 year




  3 years**




  5 years**




  Since inception**




*Benchmark is the ISEQ up to 30 July 2015, combined with MSCI All Ireland Capped Index (“MSCI Ireland”) from August 1, 2015. **per annum

1 All returns are in US dollars unless state otherwise

Ireland generally performed well over the quarter with a small lag versus other markets.

Investment Overview:

European equity markets were strong again during the quarter with the Euro Stoxx 50 up almost 7% in euros. North American and Emerging Markets were also strong regional markets, while Japan was the strongest returning 10% in local currency. Ireland was up almost 8% for the quarter.

Irish Market and Portfolio Review

Portfolio performance was strong over the quarter in absolute terms, although it lagged somewhat in relative performance terms as outlined in the table above. Some relative weakness in Ryanair (stock down approximately 5%) where we are overweight, versus strong performance from Kerry Group (stock up 12%) where we are underweight, were the main contributors to relative performance on the quarter.

Outperforming stocks during the quarter had a more stock specific feel rather than any distinct top down or sectoral leadership to them. Outperformers included Kingspan, One51 and Hostelworld. On the underperforming side, it was similarly more attributable to stock specific underperformance with two specialty biotech stocks Amryt and Malin big underperformers along with food companies Greencore and Glanbia.

Major Fund stock capital moves (in US$ terms)

  Quarter ending October 31, 2017       (MSCI Ireland +6.5%))

  Strongest portfolio returns

  Weakest portfolio returns



  Malin Corp




  Amryt Pharma






  Kerry Group




  Dalata Group


  Bank of Ireland


Irish Economic Review

GDP grew by 5.8% over the year to end June (last available data), while GNP (arguably a more accurate measure, essentially stripping out the impact of profit repatriations by multinational corporations) fell by 1.3%. The performance of both measures has been consistently strong, though highly volatile, for some time.

However, as discussed in several previous quarterly reports, GDP and GNP statistics for Ireland have become somewhat misleading. The issue is that GDP and GNP are no longer as useful as they once were in measuring the real change of activity in an economy, such as Ireland’s, which is very open to international capital and trade flows of many kinds. Fortunately, there are a range of other indicators which can be used to give a good sense of what really is happening in the economy, as below.

Retail Sales
Retail sales continue to show solid growth, but the growth rate fell to more modest levels in recent months, with the annual rate ranging between about 1% and 4%. That is not surprising, however, when we consider the high rate of growth seen previously, combined with the heightened economic uncertainty experienced since the UK's Brexit decision.

Consumer confidence is at a high level, but has flattened out recently. As with retail sales above, this is most likely not a particular cause for concern, given the very high absolute level of confidence in any case.

Manufacturing and Services Sectors
The pattern of business confidence is somewhat different to that seen in consumer confidence. Business confidence fell quite sharply in the immediate run-up to, and the aftermath of, the UK electorate’s vote to leave the European Union. But, after a trough in July (immediately after the UK referendum result), it has recovered quite well and now is at much the same level as seen in 2015, for example. This is likely to have happened because of improved economic growth and sentiment outside Ireland.

Labor Market
There continues to be a steady trend downwards in unemployment. The unemployment rate has declined to 6.0% (October data), down from a peak of 14.9%. Ireland’s unemployment rate is now substantially below the eurozone average.

Credit Growth
Credit to households and non-financial corporations continued to contract, as repayments exceeded new lending. The overall pattern is that while growth remains strong, it is certainly not being financed by debt. Both the corporate sector and the household sector continue to reduce their indebtedness, as they have done continuously since 2009.

Government Finances
The government deficit was 0.7% of GDP in 2016, a 0.5% of GDP improvement relative to 2015. For 2017, we expect that there will be a very small deficit of less than one quarter of one percent of GDP. In the 2018 Budget, announced in October, the government again forecast a very small deficit in 2018, of just 0.1% of GDP.

In a symbolically important move, credit ratings agency Moodys recognized the fiscal improvement in its September review of Ireland’s credit rating, and upgraded Ireland’s rating to A-, so all major credit rating agencies now have Ireland firmly in the ‘A’ grade.

The decision of the UK electorate to vote to leave the European Union may have significant ramifications for the Irish economy. The scale of the negative impact is such that it is likely to be noticeable, but not dramatic. We estimate that growth may be in the region of 0.5% lower per year, which is relatively modest for an economy that is likely growing at a rate in excess of 5% per annum.

Irish Economic Outlook
For 2017, the Central Bank of Ireland estimates GDP growth of 4.9%. We believe that these forecasts are somewhat overcautious and expect stronger growth, in the region of 5.5%, although we recognize that risks remain elevated given the Brexit situation.

Looking ahead to 2018, we expect growth of about 4.5% (as measured by GDP), on the assumption that the Brexit process is reasonably well-managed by the UK authorities (an assumption that is of course increasingly open to question).

Global Market Outlook

The global equity bull market is aging but we don’t believe is yet finished and forecast further upside over the next 12-18 months. So far during 2017 we have seen the winds change with global central banks increasingly taking a back seat as the core driver of equity markets and the baton is firmly handed over to traditional fundamental drivers such as economic and earnings growth. With many markets at or close to record highs, equity valuations are no longer cheap so it is crucial that economies continue to grow and that companies continue to deliver positive earnings growth. This remains our central scenario.

Although markets such as the US are at or near all-time highs, it is worth noting that this is because of the strong performance of a narrow group of ‘Growth’ stocks and predominantly technology related companies, which again re-ignited over the quarter. We remain mindful of this and while our exposure is limited to such stocks we do not expect an equity bear market but rather a rotation from such companies towards more ‘value’ stocks and sectors which themselves are not trading at all-time highs. For this to happen it is crucial that both economic and earnings growth continue to deliver. Ireland has not benefitted from this growth driven phase as the market is not represented by such companies. As such this also gives Ireland relative protection should such companies and sectors begin to unwind their large moves.

Irish Market Outlook

We remain constructive given the positive economic growth and earnings outlook but remain vigilant to political clouds overhanging from Brexit and possibly US policy. We continue to manage the portfolio with a strong bottom up stock picking emphasis, always seeking superior growth at attractive valuations and not compromising on quality. The market continues to afford such stock picking opportunities in our view.

For the portfolio, we remain confident and do not, at present, envisage major changes to the portfolio structure. We remain cautious on the UK exposure and prefer exposure to both the European and US economies for external exposure. We continue to favor stocks with strong cash flows, attractive balance sheets and strong and well managed businesses.