Portfolio Manager Commentary

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The New Ireland Fund, Inc. Portfolio Manager Commentary Quarter ending July 31, 2017

Performance Review

The New Ireland Fund Inc.'s ("Fund") returns are summarized in the table below:

  Period to July 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

The performance of the MSCI Ireland Index compared to peer global indices is summarized below. Ireland generally struggled over the quarter with a small negative performance in local currency. It was behind US indices and to a lesser extent compared to broad European indices. Although the Irish market has produced strong absolute performance over 12 months, it is still lagging other markets somewhat.

Investment Overview:

European equity markets fell during the second quarter of the year, with a decline of 1.3% for the Euro Stoxx 50 index in euros. North American and Emerging Markets were the strongest regional markets, while European markets were generally weakest giving up on some of their strong performance from earlier in the year. In terms of sectoral performance, Healthcare was the best performing sector while Energy was – by some distance – the weakest. Commodities were particularly weak, weighed down by oil and natural gas. Some of the key events/catalysts during the quarter are listed below:

Economic data

In the US, economic data were fairly mixed, as they have been for some months, with some data showing a slight loss of momentum. In Europe, data indicated broad-based strength, with business activity and hiring at the strongest it has been over the past ten years. At the one year anniversary of the Brexit vote, UK economic data finally started to soften, as the weak sterling affected UK consumer spending power. The Irish economy performed strongly.


Politics continued to dominate investor concerns over the quarter as political risk declined in Europe with the French election of President Macron, but rose in the UK, as the uncertain outcome of the UK general election impacted on Brexit negotiations and markets. Eyes were still on President Trump’s plans for healthcare and tax reform as investors increasingly questioned whether the Trump election agenda will be implemented. In the Middle East, Saudi Arabia and its allies cut ties with Qatar and made demands on Qatar to scale down its ties with Iran. In Ireland, the new and youngest ever Taoiseach Leo Varadkar succeeded the outgoing Enda Kenny in mid-June.

Interest rates

The Federal Reserve raised interest rates for the second time, in June. The US Federal Reserve stated that “job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined.” The European Central Bank kept interest rates unchanged but is expected to remain cautious as inflation has yet to rebound convincingly.

Irish Market and Portfolio Review

Performance wise the portfolio has made a strong start to the year and had a positive quarter in both absolute and relative performance terms (per table above). A feature of the quarter and the year to date has been the weakness of the US dollar. The currency has weakened by almost 10% over the past 6 months and this has helped the absolute return delivered by the portfolio when translated into US dollars.

Outperforming stocks during the quarter had a more stock specific feel rather than any distinct top down or sectoral leadership to them. Outperformers included Ryanair, Applegreen and Veolia Environmental. On the underperforming side, it was similarly more attributable to stock specific underperformance with Paddy Power, DCC and Kingspan featuring amongst the biggest underperformers (albeit modest negatives).

Major stock capital moves (US$ returns):

  Quarter ending July 31, 2017       (MSCI Ireland +4.5%))

  Strongest portfolio returns

  Weakest portfolio returns

  Malin Corp


  Paddy Power Plc


  Applegreen Plc


  Amryt Pharma Plc


  Ryanair Plc


  DCC Plc


  Veolia Environment


  Kingspan Group Plc


  Total Produce Plc


  Hostelworld Plc


Irish Economic Review

GDP grew by 6.6% over the year to Q4 of last year (last available data), while GNP (arguably a more accurate measure, essentially stripping out the impact of profit repatriations by multinational corporations) grew by an even faster rate of 7.9%. The performance of both measures has been consistently strong for some time, as the chart shows.

However, as discussed in several previous quarterly reports, GDP and GNP statistics for Ireland have become somewhat misleading. The issue is not that the statistics are in error, per se, it 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 us a good sense of what really is happening in the economy.

Retail Sales
Retail sales continue to show solid growth, but the growth rate fell to much more modest levels in recent months. That is not particularly surprising, however, when we consider the very high rate of growth seen previously, combined with the heightened economic uncertainty experienced since the UK’s decision to leave the European Union.

Consumer Confidence
Consumer confidence is at a high level, but has flattened out recently. As with retail sales above, this is 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 2016 (immediately after the UK referendum result), it has recovered quite well.

Labor Market
There continues to be a steady trend downwards in unemployment. The unemployment rate has declined and stands at 6.4% (also July 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 about 1.2% of GDP in 2016, a 2.5% of GDP improvement relative to 2015. For 2017, we expect that there will be small deficit of perhaps one quarter of one percent of GDP. The deficit is low by international standards, and the Government forecasts that the deficit will be entirely eliminated by 2019.

The decision of the UK 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 about 0.5% lower per year, which is relatively modest for an economy that is most likely growing in excess of 5% per annum.

Irish Economic Outlook
For 2017, the Central Bank of Ireland is forecasting 4.5% GDP growth as capital spending continues to be strong but consumer spending comes under modest pressure. We believe that these forecasts are somewhat overcautious and expect stronger growth, in the region of 5%, although we recognize that risks remain elevated given the Brexit situation.

Global Market Outlook

The global equity bull market is aging but we do not believe is yet finished and forecast further upside over the next 12-18 months. 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. For global equities, we expect further upside but expect single rather than double digit gains. Ireland should be better positioned given the superior growth dynamic of the country.

Although markets such as the US are at or near all-time highs, this is because of the strong performance of a narrow group of ‘Growth’ stocks and predominantly technology related companies. We do not expect an equity bear market but rather a rotation from such companies towards more ‘value’ stocks. Ireland has not benefitted from this growth driven phase as the market is not represented by such companies. 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. The corporate sector is in good health, with plenty of cash on its balance sheet and relatively little debt.

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.