Other Information

Bankers

Central Bank of Ireland
Dame Street
Dublin 2

Allied Irish Banks p.l.c.
1-4 Lower Baggot Street
Dublin 2

Global Custodian

The Bank of New York Mellon (“BNYM”)
One Canada Square
London E14 5AL

Auditor

Comptroller and Auditor General
Dublin Castle
Dublin 2

Controller And Manager

National Treasury Management Agency
Treasury Building
Grand Canal Street
Dublin 2

Investment Report

Pursuant to section 38(1) of the National Treasury Management Agency (Amendment) Act 2014 (“NTMA Act 2014”), the Ireland Strategic Investment Fund (“the Fund”) was established on 22 December 2014. The assets and liabilities of the National Pensions Reserve Fund (“NPRF”) became assets and liabilities of the Fund on 22 December 2014, except for certain foreign assets and liabilities. The assets remaining in the NPRF as at 31 December 2014 have been derecognised by the NPRF Commission and are presented within the Fund’s financial statements for the period ending 31 December 2014.  With the exception of the Directed Investments the Agency determines the investment strategy for the Fund.

 

A summary of the Investment assets of the Fund is listed below:	2014 €m	% of Total Investment Assets
Quoted Investments	3,528	16.2%
Unquoted Investments	1,237	5.6%
Loans and Receivables	338	1.6%
Deposits, Cash and Other Investments	1,689	7.8%
Derivatives	(22)	(0.1%)
Total Discretionary Investment Assets	6,770	31.1%
Directed Investments	13,123	60.3%
Cash	1,109	5.1%
Repurchase Agreements	765	3.5%
Total Directed Investments	14,997	68.9%
Total Investment Assets	21,767	100.0%

 

 

Conor O’Kelly, Chief Executive
National Treasury Management Agency

Willie Walsh, Chairperson
National Treasury Management Agency
15 June 2015

 

Comptroller and Auditor General Report for presentation to the Houses of the Oireachtas

Ireland Strategic Investment Fund

I have audited the financial statements of the Ireland Strategic Investment Fund for the period ended 31 December 2014 under the National Treasury Management Agency Act 1990. The financial statements, which have been prepared under the accounting policies set out therein, comprise the accounting policies, the fund account, the net assets statement, the cash flow statement and the related notes. The financial statements have been prepared in the form prescribed under section 12 of the Act.

Responsibilities of the National Treasury Management Agency

The National Treasury Management Agency (the Agency) is responsible for the preparation of the financial statements, for ensuring that they give a true and fair view of the results of the Fund’s operations for the period and of its balances at year end, and for ensuring the regularity of transactions.

Responsibilities of the Comptroller and Auditor General

My responsibility is to audit the financial statements and report on them in accordance with applicable law. My audit is conducted by reference to the special considerations which attach to State bodies in relation to their management and operation. My audit is carried out in accordance with the International Standards on Auditing (UK and Ireland) and in compliance with the Auditing Practices Board’s Ethical Standards for Auditors.

Scope of audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements, sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of

• whether the accounting policies are appropriate to the Fund’s circumstances, and have been consistently applied and adequately disclosed
• the reasonableness of significant accounting estimates made in the preparation of the financial statements, and
• the overall presentation of the financial statements.

I also seek to obtain evidence about the regularity of financial transactions in the course of audit. In addition, I read the information about the Fund in the Agency’s annual report to identify if there are any material inconsistencies with the audited financial statements. If I become aware of any apparent material misstatements or inconsistencies I consider the implications for my report.

Opinion on the financial statements

In my opinion, the financial statements, which have been properly prepared in accordance with the National Treasury Management Agency Act 1990 in the form approved by the Minister for Finance, give a true and fair view of the results of the Fund’s operations for the period ended 31 December 2014 and of its balances at that date.

In my opinion, proper books of account have been kept by the Agency. The financial statements are in agreement with the books of account.

Matters on which I report by exception

I report by exception if

• I have not received all the information and explanations I required for my audit, or
• my audit noted any material instance where public money has not been applied for the purposes intended or where the transactions did not conform to the authorities governing them, or
• the information about the Fund in the Agency’s annual report is not consistent with the related financial statements, or
• the statement on internal financial control does not reflect the Agency’s compliance with the Code of Practice for the Governance of State Bodies, or
• I find there are other material matters relating to the manner in which public business has been conducted.

I have nothing to report in regard to those matters on which reporting is by exception.

 

Seamus McCarthy
Comptroller and Auditor General

16 June 2015

Accounting Policies

The Ireland Strategic Investment Fund (“the Fund”) was established on 22 December 2014 on the commencement of the National Treasury Management Agency (Amendment) Act 2014 (“NTMA Act 2014”). The National Treasury Management Agency ( the “Agency” or the “Manager”) is the controller and manager of the Fund. The statutory mandate of the Fund is to invest on a commercial basis in a manner designed to support economic activity and employment in the State. In addition in accordance with section 42 and 43 of the NTMA Act 2014 the Minister may give directions in relation to certain investments. The significant accounting policies adopted in respect of the Fund are as follows:

(a) Basis of Preparation

The financial statements have been prepared in accordance with section 12 of the National Treasury Management Agency Act, 1990 in a format approved by the Minister for Finance.

On the commencement of Part 6 of the NTMA Act 2014, the assets and liabilities of the NPRF became the assets and liabilities of the Fund (subject to the provisions of schedule 4 of the Act in the case of certain foreign assets and foreign liabilities). The legal transfer of foreign assets must be done in conjunction with the relevant counterparty. This process is ongoing, and certain foreign assets remained in the NPRF as at 31 December 2014. These assets (held by the NPRF Commission) have been derecognised, and are recognised and presented within the Fund’s financial statements for the period ending 31 December 2014, in line with Accounting Standards.

The financial statements summarise the transactions and net assets of the Fund.

Notwithstanding the Fund’s significant holdings in the equity of Bank of Ireland and Allied Irish Banks, (“the Directed Investments”) the Agency (as Manager and Controller of the Fund) does not have the ability to exercise control, dominant influence or significant influence, over the Directed Investments. Therefore, the Agency does not consolidate the results and the financial position of Bank of Ireland or Allied Irish Banks into the financial statements of the Fund.

(b) Reporting Period

The reporting period is the period from establishment of the Fund on 22 December 2014 to 31 December 2014.

(c) Reporting Currency

The reporting currency is the euro which is denoted by the symbol €. Monetary amounts are stated in €m unless otherwise indicated. Where used, ‘€000’ or ‘k’ denotes thousand, ‘m’ denotes million and ‘bn’ denotes billion.

(d) Investments

The Fund holds two types of investments:

(i) Discretionary Investments
Investments made in accordance with Part 6 of the NTMA Act 2014, whereby the Agency shall hold or invest the assets of the Fund on a commercial basis in a manner designed to support economic activity and employment in the State.

(ii) Directed Investments
The Agency holds the Directed Investments subject to directions given by the Minister for Finance pursuant to section 43 of the NTMA Act 2014. The holding and management of the Directed Investments, the exercise by the Agency of voting and other rights attaching to the Directed Investments and the disposal by the Agency of the Directed Investments must be conducted in accordance with any directions given by the Minister for Finance.

Any interest or other income received in respect of deposits and / or securities held in the Directed Portfolio are transferred to the Discretionary Portfolio and are held or invested by the Agency in line with Ministerial Direction.

(e) Valuation of Discretionary Investments

Investments are recorded on a trade date basis and are stated at fair value. Fair value is determined as follows for quoted, unquoted, loans and receivables and derivative investments:

(i) Quoted Investments
Fair value is the closing market value on the primary exchange or market where the investment is quoted.

(ii) Unquoted Investments
Fair value is estimated by the National Treasury Management Agency as Manager and Controller of the Fund and approved by the Agency. The principal unquoted valuations are as follows:

Investments in Property, Private Equity, Forestry and Infrastructure Funds
The estimated fair value for unquoted investments in property, private equity, forestry and infrastructure funds for which there is not an active market is based on the latest audited valuation placed on the fund or partnership by the external manager of that fund or partnership. Where an audited valuation is not available, in circumstances such as where the fund or partnership’s year end does not coincide with that of the Fund, the latest available unaudited valuation is used.

The valuations of these investments are determined by external managers using accepted industry valuation methods and guidelines published by relevant industry bodies. Such valuation methodologies used by external managers may include considerations such as earnings multiples of comparable publicly traded companies, discounted cash flows, third party transactions, or events which suggest material impairment or improvement in the fair value of the investment. In the first year of ownership cost is usually considered to be an appropriate estimate of the fair value for these investments unless there is an indication of a permanent impairment in value.

A range of possible values can exist for these investments and estimated fair values may differ from the values that would have been used had there been an active market value for such investments.

The Agency relies on the external managers’ valuations as being a representative estimate of the fair value of an investment. The Agency has established procedures to periodically review the fund or partnership’s valuation of these investments. Based on its judgement, and relevant information available to it, the Agency may in certain circumstances determine that an adjustment to the external manager’s valuation is appropriate in recording an investment’s fair value.

Unquoted Bonds
Unquoted bonds are valued at their fair value as estimated by the Manager using bond valuation models based on observable market data.

Unquoted Investment Funds
Unquoted investment funds are valued at the most recent Net Asset Value as published by the funds’ administrators.

(iii) Loans and Receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are measured at amortised cost using the effective interest rate method less any impairment.

(iv) Derivatives

Futures
Futures contracts used by the Fund’s investment managers are valued at their closing market value on the exchange on which they are traded and are recognised as investment assets.

Foreign Exchange Contracts
The market value of Foreign Exchange Contracts is the unrealised gain / loss on the contract at the Net Assets Statement date.

Equity Options
Equity options are valued at their closing market value on the exchange on which they are traded and are recognised as investment assets.

(f) Valuation of Directed Investments

Directed Investments are valued as follows:

Ordinary Shares
The ordinary shares held as part of the Directed Investment portfolio are valued at fair value. Fair value is the closing market value on the primary exchange or market where the investment is quoted. Where closing market prices are deemed not to be a reliable estimation of fair value, ordinary shares are valued using appropriate valuation methodologies. Valuation methodologies used include discounted cash flow analysis, total equity analysis, comparable company analysis or precedent transaction analysis.

Preference Shares
The preference shares held as part of the Directed Investment portfolio are valued at fair value. Fair value is determined using valuation methodologies which may include discounted cash flow analysis, an annuity valuation based on comparable company yields, comparable company analysis or precedent transaction analysis.

(g) Gains and Losses on Investments

Realised and unrealised capital gains and losses on investments are dealt with in the Fund Account in the period in which they arise (Change in Value of Investments).

(h) Long Term Receivables

Long term receivables are shown at their fair value. The fair value of these receivables is estimated by discounting the contractual future cash flows at the market rate that is currently available to the Fund for similar financial instruments.

(i) Cash Collateral arising from Derivative Transactions

Cash received / posted as collateral arising from derivative transactions is recorded as an asset / liability on the Net Assets Statement and is valued at its fair value. The obligation to repay the collateral is recorded as a liability and the entitlement to receive the collateral is recorded as an asset in the Net Assets Statement.

(j) Investment Income

Income from investments is recognised at fair value on an accruals basis. Dividends are credited to income on the dates on which the relevant securities are listed as “ex-dividend”. Income is shown gross of any non-recoverable withholding taxes which are disclosed separately in the Fund Account as part of the taxation charge.

(k) Expenses

Expenses are accounted for in the period in which they fall due.

(l) Foreign Currencies

All transactions in foreign currencies are translated into euro at the rate of exchange prevailing at the dates of such transactions. Assets and liabilities in foreign currencies are translated into euro at the rate of exchange ruling at the period end date.

Exchange differences arising on the revaluation of investments and settlement of investments are dealt with in the change in market value of investments. Exchange differences arising on income items are accounted for as part of investment income.

(m) Securities Lending

The Fund undertakes securities lending arrangements whereby securities are loaned to external counterparties for a set period of time. The Fund receives collateral of greater value than the securities loaned for the duration of the loan period and receives interest where the collateral assets are reinvested. Under the terms of the securities lending agreements, the Fund retains substantially all the risks and rewards of ownership of the loaned securities and also retains the rights to any cashflows relating to the securities. Therefore the loaned securities are not derecognised from the Fund’s Net Assets and collateral assets held are not recognised in the Fund’s Net Assets Statement.

Fund Account

	Note		22 December 2014 to 31 December 2014 €m
	€000		€000
Discretionary Portfolio
– Discretionary Investment Income	1		3
– Change in Value of Investments	6(e)		10
– Taxation	2		–
Discretionary Investment Return			13
Directed Investments Portfolio
– Directed Investment Income	3		–
– Change in Value of Investments	9(b)		4
Directed Investment Return			4
Total Investment Return after Tax			17
Fund Expenses	5		(1)
Total Investment Return after Tax and Expenses			16
Contributions
– Assets Transferred from NPRF	4(a)		22,153
Total Contributions			22,153
Increase in Fund during the Period			22,169
Net Assets of Fund at Start of Period			–
Net Assets of Fund at Period End			22,169

The accounting policies and notes 1 to 16 form part of these financial statements.

On behalf of the Agency

Conor O’Kelly, Chief Executive
National Treasury Management Agency

Willie Walsh, Chairperson
National Treasury Management Agency

15 June 2015

Net Assets Statement

	Note		Period Ended 31 December 2014 €m
Discretionary Portfolio
Discretionary Investments	6		6,770
Non Current Assets	7(a)		356
Current Assets	7(b)		53
Current Liabilities	8(a)		(7)
Net Assets – Discretionary Portfolio			7,172
Directed Investments Portfolio
Directed Investments	9(a)		14,997
Net Assets – Directed Investments Portfolio			14,997
Net Assets of the Fund at Period End			22,169

The accounting policies and notes 1 to 16 form part of these financial statements.

On behalf of the Agency

Conor O’Kelly, Chief Executive
National Treasury Management Agency

Willie Walsh, Chairperson
National Treasury Management Agency
15 June 2015

Cashflow Statement

 

	22 December 2014 to 31 December 2014 €m
Discretionary Investments Cashflow
Cashflows from Operating Activities
Purchase of Investments	(93)
Proceeds from Sale of Investments	275
Net Cash from Operating Activities	182
Cashflows from Financing Activities
Transfer from NPRF	55
Net Cash from Financing Activities	55
Net Increase in Cash	237
Cash at Beginning of Period	–
Exchange Gain on Cash	2
Net Increase in Cash	237
Cash at End of Period	239
	2014 €m
Directed Investments Cashflow
Cashflows from Operating Activities
Net proceeds from Sale of Investments	1,109
Net Cash from Operating Activities	1,109
Net Increase in Cash	1,109
Cash at End of Period	1,109

 

Notes to the Financial Statements

1. Discretionary Investment Income

	2014 €000
Income from Discretionary Investments
Equities	1,926
Bonds	921
Private Equity	13
Deposits	(1)
Other Income	78
	2,937

2. Taxation

The income and profits of the Fund are exempt from Irish Corporation Tax in accordance with section 230 (1A) of the Taxes Consolidation Act, 1997 which was inserted by the NTMA Act 2014. The Fund may, however, be liable for taxes in overseas jurisdictions where full tax exemptions are not available.

Dividends and interest may be subject to irrecoverable foreign withholding taxes imposed by the country from which the investment income is received. Distributions of income and gains received by the Fund from its property and private equity fund investments may also be subject to foreign withholding taxes. The Fund may also be subject to additional foreign taxes payable on certain property and private equity investments annually, based on their asset values at the reporting date.

The foreign taxes provided for are detailed below:

	2014 €000
Withholding Tax Reclaim	–
Foreign Taxes on Income	(266)
Net Tax Cost	(266)

In 2014, the Fund received €Nil Withholding Tax Reclaims in relation to tax reclaims submitted for the period from 22 December to 31 December 2014.

3. Directed Investment Income

	2014 €000
Income from Discretionary Investments
Income Received – Cash Instruments	16
	16

The Income received from Cash Instruments is the interest received from Irish Exchequer notes that were held in 2014. The holding of preference shares in Allied Irish Banks (“AIB”) entitles the Fund to an annual dividend which is payable in May each year.

4. Contributions / Withdrawals

(a) Assets transferred to the Fund

The breakdown of the assets transferred from the NPRF to ISIF on 22 December 2014 is below:

		2014 €000
Discretionary Portfolio
Currency and other Investment Funds		1,772
Cash Enhancement Investments		1,724
Equities		1,248
Bonds		868
Deposits, Cash and other Investments		361
Debt		321
Commodity Investments		288
Property Investments		242
Private Equity Investments		230
Infrastructure Investments		76
Equity Options		30
Forestry Investments		25
Unrealised gain / (loss) on futures contracts		(7)
Unrealised gain / (loss) on foreign currency contracts		(32)
		7,146
Current Assets		396
Current Liabilities		(395)
Other (see note 4(b))		13
Total Discretionary Portfolio		7,160
Directed Portfolio
Directed Investments		13,119
Deposits, Cash and other Investments		1,874
Total Directed Portfolio		14,993
Total Assets Transferred		22,153

Pursuant to the NTMA Act 2014, all assets of the NPRF governed by Irish law transferred automatically by operation of law from the NPRF Commission to the NTMA on 22 December 2014 (becoming assets of the Fund). The value of the assets transferred to the Fund was €22,153m.

(b) Assets derecognised by the NPRF

From the 22 December 2014 the NPRF Commission consists of a single commissioner (the Chief Executive, NTMA) who is required by the NTMA Act 2014 to do everything that is reasonably practicable to give effect to the transfer of any remaining assets governed by foreign law. The legal transfer of foreign assets must be done in conjunction with the relevant counterparty. This process is ongoing, and some foreign assets remained in the NPRF as at 31 December 2014. The assets of the NPRF have been derecognised by the NPRF Commission, and are recognised and presented within the Fund’s financial statements for the period ending 31 December 2014, in line with Accounting Standards.

A breakdown of the assets remaining in legal ownership of the NPRF as at 31 December 2014 reflected in the Financial Statements of the Fund is listed below:

	2014 €000
Discretionary Portfolio
Equities	1,084
Currency and Other Investment Funds	273
Property Investments	242
Private Equity Investments	169
Deposits, Cash and other Investments	2
	1,770
Current Assets	37
Current Liabilities	7
Total Assets derecognised by NPRF	1,800

The €1,800m above is included in the €22,153m assets transferred from the NPRF to ISIF. The movement in the value of these assets in the period from the 22 December to 31 December 2014 was €13m. As at 30 April 2015 the market value of assets remaining to be transferred to the Fund was €240m.

5. Fund Expenses

€293k represents the amount required to cover the investment management and administration costs of the Fund.

 

	2014 €000
(a) General Administration Fees and Expenses
Legal Fees	33
National Treasury Management Agency Recharge	182
	215
(b) Directed Investment Fees and Expenses
Advisory Fees	78
Total Expenses	293

Under section 48 of the NTMA Act 2014, the expenses of the Agency in the performance of its functions to the Fund may be defrayed from the Fund. These amount to €182k in 2014.

6. Discretionary Investment Assets

Pursuant to section 38(1) of the NTMA Act 2014, the Fund was established on 22 December 2014. All assets and liabilities of the NPRF became assets and liabilities of the Fund on the commencement of the NTMA Act 2014.

(a) Summary of Assets

 

	2014 €000
Quoted Investments
Global Low Volatility Equity Funds	1,360
Developed Markets Equities	1,076
Corporate Bonds	534
Commodity Investments	281
Emerging Markets Equities	196
Currency Investments	81
Total Quoted Investments	3,528
Unquoted Investments
Other Investment Funds	338
Corporate Bonds	247
Property Investments	246
Private Equity Investments	240
Infrastructure Investments	76
Other Bonds	63
Forestry Investments	27
Total Unquoted Investments	1,237
Loans and Receivables
Other Debt	321
Other Bonds	17
Total Loans and Receivables	338
Derivatives
Equity Options	31
Unrealised Loss on Futures Contracts	(6)
Unrealised Loss on Foreign Exchange Contracts	(47)
Total Derivatives	(22)
Deposits, Cash and other Investments
Cash Enhancement Investments	1,450
Deposits and Cash	239
Total Deposits, Cash and Other Investments	1,689
Total Discretionary Investment Assets	6,770

 

(b)  Analysis by Geographical Classification	2014 €m
Europe	4,980
North America	1,482
Emerging Markets	210
Asia Pacific	98
	6,770

 

(c) The Investment Assets of the Fund at the period end are held as follows:	2014 €m
Investment Managers
BlackRock Advisors (UK) Limited	1,273
Deutsche Asset Management International GmbH	556
National Treasury Management Agency	137
Citigroup Global Markets Limited	51
	2,017
Other Investments
Cash Enhancement Investments	1,450
Global Low Volatility Equity Funds	1,360
Other Investment Funds	338
Other Debt	321
Commodity Investments	281
Unquoted Property Investments	248
Unquoted Corporate Bonds	247
Unquoted Private Equity Investments	244
Currency Funds	81
Other Bonds	80
Unquoted Irish Infrastructure Fund	76
Forestry Investments	27
	4,753
Total Investment Assets	6,770

 

(d) Valuation of Investments

The investment assets of the Fund are valued at their fair value as described in the accounting policy on the valuation of investments.

The following table analyses the investment assets between those whose fair value is based on:

• Level 1 – Quoted prices in active markets for identical assets or liabilities.
• Level 2 – Valuation techniques involving only the use of model inputs observable in the market.
• Level 3 – Valuation techniques which do not involve the use of model inputs observable in the market.

	2014 Level 1 €m	2014 Level 2 €m	2014 Level 3 €m	2014 Total €m
(i) Listed Equities and Managed Funds
Listed Equity Securities	2,632	–	–	2,632
Commodity Investments	281	–	–	281
Other Investment Funds	–	338	–	338
Currency Funds	81	–	–	81
Forestry Investments	–	–	27	27
(ii) Debt Securities
Unlisted Debt Securities	–	631	17	648
Listed Debt Securities	534	–	–	534
(iii) Limited Partnerships/Trusts
Property	–	–	246	246
Private Equity	–	–	240	240
Infrastructure	–	–	76	76
(iv) Derivatives Financial Assets
Cash and Cash Equivalents	1,689	–	–	1,689
Equity Options	31	–	–	31
Futures Contracts	(6)	–	–	(6)
Foreign Exchange Contracts	(47)	–	–	(47)
	5,195	969	606	6,770

Investment assets included in Level 3 include Property, Private Equity, Forestry, Infrastructure and Unlisted Debt Securities, for which there is currently no active market. In valuing these investments the Fund relies on valuations received from external managers as outlined in the accounting policy.

The following table shows a reconciliation of all movements in the fair value of investment assets categorised within Level 3 between the beginning and the end of the period:

 

Investment Assets included in Level 3	2014 €
Opening Valuation	–
Transfers from NPRF	588
Total Net Level 3 Gains and Losses in the Fund Account	21
Net Transfer out of Level 3	(3)
Closing Valuation	606

 

(e)  The Movement in the Value of Discretionary Investments Held by the Fund during the Period was as Follows:	2014 €
Value of Investments as at Start of Period	–
Assets Transferred from NPRF	7,160
Realised Loss on Investments	0
Unrealised Gain on Investments	10
Movement in Pending Settlements	(8)
Transfer to Long Term Receivable	(356)
Movement in Cash Collateral	(35)
Fund Expenses Paid	(1)
Net Cash Movement	–
Total Investments	6,770

7(a) Non Current Assets

	2014 €
Long Term Receivables	356

Long term receivables represent the present value of the contractual cash flows receivable in the period to 2017 arising from the sale of private equity investments by the Fund.

7(b) Current Assets

	2014 €
Cash Collateral arising from Derivative Transactions (7c)	35
Accrued Interest on Fixed Income Securities	11
Amounts Receivable for Securities Sold	3
Dividends Receivable	2
Tax Reclaims Recoverable	2
	53

7(c) Cash Collateral Arising From Derivative Transactions

	2014 €
Opening Balance	–
Collateral Transferred from NPRF	35
Net Cash Collateral held	35

Cash collateral arising from derivative transactions under Credit Support Annexes (CSA), represents cash deposits with / from derivative counterparties. These balances can change on a daily basis and are dependent on the market value of the underlying derivatives. At 31 December 2014 the cash collateral was held with Royal Bank of Scotland.

8. Current Liabilities

	2014 €
VAT Payable and Other Accrued Expenses	4
Amounts Payable for Securities Purchased	3
	7

9. Directed Investments

The Agency holds the Directed Investments subject to directions given by the Minister for Finance pursuant to section 43 of the NTMA Act 2014. The holding and management of the Directed Investments, the exercise by the Agency of voting and other rights attaching to the Directed Investments and the disposal by the Agency of the Directed Investments must be conducted in accordance with any directions given by the Minister for Finance. Pursuant to the NTMA Act 2014, all assets of the NPRF governed by Irish law, including the Directed Investments, automatically transferred by operation of law from the NPRF Commission to the NTMA on 22 December 2014 (becoming assets of the ISIF).

(a) Directed Investments Valuation	2014 Units Millions	Valuation (€) Per Unit	2014 €000
Bank of Ireland (BoI)
Ordinary Shares1	4,512	0.313000	1,412
Allied Irish Banks (AIB)
Ordinary Shares2	522,556	0.013699	7,159
Preference Shares2	3,500	1.300667	4,552
			11,711
Total Directed Investments Assets			13,123
Directed Investments Cash			1,109
Repurchase Agreements3			765
Total Directed Investments			14,997

¹ The valuation of BoI Ordinary shares is based on quoted prices.

²Given the Fund’s ordinary share holding in AIB (99.8%) and as the preference share investments in AIB are unlisted and not traded, the Agency engaged EY to provide an independent fair value of the investments as at 31 December 2014.

³The reverse repurchase agreement is an agreement to purchase Irish bonds and to sell them back to the original seller at a higher price at a fixed date in the future.

Pursuant to a direction dated 4 December 2013, the Minister for Finance directed the Fund to invest the cash proceeds from the sale of BoI preference shares in securities guaranteed by the Minister at prevailing market rates. These securities valued at €1,874m were transferred from the NPRF to the Fund on 22 December 2014.

 

(b) Summary of Directed Investment valuation movement	2014 €
Bank of Ireland (BoI)
Transferred from NPRF	1,421
Investment Loss during the Period	(9)
Closing Valuation	1,412
Allied Irish Banks (AIB)
Transferred from NPRF	11,698
Investment Gain during the Period	13
Closing Valuation	11,711

In determining the Fund’s valuation of AIB, EY considered a number of valuation methodologies including an annuity valuation based on comparable company yields, comparable company analysis and precedent transaction analysis.

For the purposes of valuing the AIB Ordinary shares, a comparable company analysis was deemed the most appropriate methodology. This analysis used comparable, publicly available, market multiples such as tangible book value relative to return on equity to allocate value to the ordinary shares. EY also had consideration to other multiples such as price to earnings and price to book. The Preference Shares were valued by reference to the 25% step-up in May 2014 (Note 9(c)).

The increase in value of the investment between 31 December 2013 and 31 December 2014 is based primarily on two factors;

1. Increase in net book value of AIB over the period;

2. Increase in selected market multiple, based on improving trading performance of the company and a better outlook across the sector.

It should be noted that there are a number of sensitivities which may impact the AIB valuation including:

• Changes in sentiment and perceptions of investors regarding banks and the outlook for the banking industry and the broader domestic and European economy.
• AIB is heavily exposed to the domestic Irish economy. A change in economic conditions may impact on the implied valuations.

All other things remaining constant, a 1% movement in the valuation of the comparable peer group would have impacted the AIB Ordinary Share valuation by approximately €72m as at 31 December 2014.

(c) Directed Investment Summary
At 31 December 2014, the Fund’s percentage ownership of AIB and BoI was 99.8% and 13.95% respectively.

The AIB preference shares pay an annual non-cumulative fixed dividend of 8%. If the dividend is not paid in cash, the fund will receive the dividend in the form of ordinary shares. The preference shares can be repurchased by AIB at €1 per share within the first five years after issue and thereafter at €1.25 per share. The step-up to €1.25 per share became effective from May 2014. This will have no impact on the dividend income.

(d) Directed Investment Transactions during 2014
The Directed Investments were transferred to the Fund on 22 December 2014 on the commencement of the relevant sections of the NTMA Act 2014. No new directed investment transactions occurred in the period from 22 December to 31 December 2014.

(e) Developments since the year end
On 13 May 2015 AIB paid the Fund the preference share dividend of €280m in cash.

(f) Ministerial Directions during 2014
Pursuant to a direction dated 15 May 2014, the Minister for Finance directed the NPRF Commission (under section 19B(1) of the NPRF Act) to execute a Letter of Consent to the Capital Reduction of AIB, substantially in the form of the letter attached to the direction. The AIB shares held by the NPRF Commission transferred to the NTMA by operation of law on 22 December 2014.

Pursuant to a direction on 10 September 2014 under section 19B(c) of the NPRF Act, the Commission provided funds of €10 million to the Strategic Banking Corporation of Ireland (“SBCI”) for the purpose of funding the Minister for Finance’s subscription for shares in the SBCI in September 2014.

Pursuant to a direction dated 30 October 2014, the Minister for Finance directed the NPRF Commission to provide a loan facility of €240 million to the Strategic Banking Corporation of Ireland. To facilitate drawdowns pursuant to such loan facility, the NPRF Commission was also directed to dispose of certain securities and to hold the proceeds of such disposal in short term securities and / or on deposit. This loan facility transferred from the NPRF Commission to the NTMA by operation of law on 22 December 2014.

10. Commitments

(a) Foreign Currency and Futures Commitments

The notional principal and unrealised gain / (loss) of currency derivative contracts entered into by the Manager and investment managers on behalf of the Fund was:

	2014 Notional Principal €m	2014 Unrealised loss €m
NTMA
Forward Foreign Exchange Contracts	1,546	(47)
Investment Managers
Financial Futures	33	(6)
		(53)

Foreign Exchange Contracts
The Fund follows a policy of hedging its foreign currency risk, using forward foreign exchange contracts. The Fund’s investment managers are not required to hedge currency exposure. They are permitted to carry out spot and foreign exchange contracts in order to satisfy the settlement of securities transactions,and to manage their portfolios solely in line with the Statement of Investment Objectives and Restrictions agreed with the Fund. The notional value represents the total contracted foreign exchange contracts outstanding at the period end. A negative notional position represents a short position.

Financial Futures
The Fund’s investment managers are permitted to execute futures contracts solely in line with the Statement of Investment Objectives and Restrictions agreed with the Fund.

(b) Uncalled Investment Commitments
The Fund has entered into commitments in respect of certain types of investments as outlined below.

	2014 €m
Unquoted Investments
Private Equity Investments	222
Infrastructure Investments	183
SME Credit Investments	120
SME Equity Investments	111
SIF Real Estate	75
Property Investments	39
Total Unquoted Investments	750
Loans and Receivables
Covanta	44
Public Private Partnership	26
Total Loans and Receivables	70
Total Uncalled Commitments	820

11. Contingent liabilities

In the opinion of the Agency the Fund has no material contingent liabilities at 31 December 2014.

12. Securities Lending

Through a programme managed by its Global Custodian, some of the securities in the Fund are loaned from time to time. The Fund receives income through the Global Custodian for securities loaned. During the period to 31 December 2014 the Fund earned €77k through securities lending.

Loans are made to approved counterparties who meet minimum credit criteria. The loans are secured by collateral in the form of government bonds; bonds of specified supranational issuers; specified equity index baskets and cash. The value of the collateral maintained by the Global Custodian must be at least 102% of the market value of securities loaned where the collateral is in the same currency as the loaned securities and 105% where the collateral is not in the same currency as the loaned securities. Where the value of collateral falls below the required limits additional collateral is called by the Global Custodian from the counterparty, restoring collateral requirements the following day.

The market value of securities loaned at 31 December 2014 amounted to €148.4m. The Fund held collateral of 111.6% of the market value of securities loaned.

13. Related Parties

(a) Minister for Finance
Ownership of the Fund vests in the Minister for Finance pursuant to section 38(3) of the NTMA Act 2014. Under section 46(2) of the NTMA Act 2014 the Minister for Finance may make payments into the Fund from the Central Fund. Where the Minister proposes to make a payment into the Fund, the Minister must seek approval from the Houses of the Oireachtas before processing the payment.

(b) National Treasury Management Agency
The Fund is controlled and managed by the Agency pursuant to section 41(1) of the NTMA Act 2014. The Agency provides business and support services and systems in addition to assigning staff to the Fund. Under section 48 of the NTMA Act 2014, the expenses of the Agency are defrayed from the Fund. The cost of these business and support services and systems and staffing for the period from 22 December 2014 to 31 December 2014 was €182k.

14. Financial Risk Management

In the ordinary course of its activities, the Fund actively manages a variety of financial risks including market risk, credit risk and liquidity risk. The Fund identifies, measures and monitors risk through various control mechanisms as detailed in the following sections. The base currency of the Fund is euro. The measured returns and monitored portfolio risks are aggregated in euro. The Agency is responsible for the risk in the Discretionary Portfolio whereas the risks associated with Directed Investments are the responsibility of the Minister for Finance. This note refers solely to financial risk in the Discretionary Portfolio.

(a) Market Risk – Price, Currency and Interest Rate Risks
Market risk is the risk of potential loss the Fund may incur as a result of adverse changes to the fair value of the Fund’s financial instruments due to fluctuations in risk factors such as interest rates, foreign exchange rates and market prices. Market risk includes fluctuations in equity, bond and other investment prices, currency rates and interest rates. The Agency has endeavoured to maximise potential return while keeping volatility within acceptable limits by diversifying the Fund’s investments across multiple asset classes. The Fund has a Capital Preservation Strategy which provides some downside protection against equity market declines while providing some upside participation if markets perform well.

The Agency monitors the Fund’s absolute market risk (an ex-ante measure) and the Fund’s performance (an ex-post measure) on a daily basis. This is the critical control in overseeing the total risk arising within the Fund. The risk management procedures further described in this note principally reflect more detailed analysis of components of the Fund’s market risk. Market risk comprises three types of risk: price risk, currency risk and interest rate risk.

(i) Price Risk
Price risk is the risk that the value of an asset will fluctuate in its local currency due to changes in market price, caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.

Price Risk Exposure
The maximum asset value exposed to price risk at 31 December 2014 is the value of investment assets as detailed in the following table:

 

	2014 €m
Exposed to Price Risk
Quoted Investments 1	3,559
Cash Enhancement Investments	1,450
Unquoted Investments	986
Property	246
Private Equity	240
Infrastructure	76
Forestry	27
Derivative Instruments (Net)	(53)
Total	6,531
Not Exposed to Price Risk
Cash	239
Total Discretionary Fund Investment Assets	6,770

¹The Fund’s exposure to quoted investments was reduced by €132m in 2014 through the usage of futures contracts (not included in the above table). The Fund held equity index put options with a notional value of €1,520m on 31 December 2014.

Price Risk Management
A geographical analysis of the Fund’s investment portfolio is shown in Note 6(b). This shows that there is a level of diversification by market. The Agency monitors the price risk inherent in the investment portfolio by ensuring full and timely access to relevant information from the Fund’s Investment Managers. The Agency meets the Investment Managers regularly and at each meeting reviews investment performance.

(ii) Currency Risk
Currency risk is the risk that the value of an asset or liability will fluctuate due to changes to currency exchange rates. The base currency of the Fund is euro. The Fund has investment assets denominated in currencies other than euro and is therefore impacted by fluctuations in currency exchange rates. The Fund has no significant financial liabilities denominated in currencies other than euro. The Fund has outstanding commitments in respect of property and private equity investments of USD 234m and JPY 16m as at 31 December 2014.

Currency Risk Management
The Fund follows a policy designed to reduce its foreign currency risk, using forward foreign exchange contracts (See Note 10(a)). In respect of quoted developed equities the Fund used forward foreign exchange contracts to maintain a currency exposure of 50% of the foreign currency exposure of the Fund’s underlying holdings. In respect of its property and private equity investments, the Fund hedged 50% of its non-euro private equity investments and 100% of its non-euro property investments. The loss on these forward foreign exchange contracts offsets the change in the value of the Fund’s non-euro investments due to exchange rate movements.

Currency Risk Exposure
The following table details the asset values exposed to currency risk as at 31 December 2014 both before and after the impact of the currency hedge:

 

Currency of Investments Assets: 2014	Local Currency €m	Base Currency €m	Hedge €m	Net Exposure €
US Dollar	2,603	2,144	(1,320)	824
Other*	Various	146	(6)	140
British Pound	59	76	(56)	20
Hong Kong Dollar	610	65	(10)	55
Canadian Dollar	70	50	(34)	16
Australian Dollar	29	19	(10)	9
Japanese Yen	1,349	9	(36)	(27)
Swiss Franc	8	7	(10)	(3)
Swedish Krona	53	6	(4)	2
Norwegian Krona	23	3	(5)	(2)
Danish Krone	19	3	(5)	(2)
Singapore Dollar	5	3	(5)	(2)
Total		2,531	(1,501)	1,030

* Other is made up of several currencies including South African Rand, Taiwanese Dollar, Mexican Peso and Brazilian Real.

(iii) Interest Rate Risk
Interest rate risk is the risk that future cash flows of a financial instrument, and the value of a financial instrument, will fluctuate due to changes in the market interest rates. The Fund’s fixed income investments are susceptible to value changes due to fluctuations in market interest rates.

Interest Rate Exposure
The following table details the value of fixed interest-bearing securities exposed to interest rate risk as at 31 December 2014:

Fixed Interest Bearing Investments	2014 €000
Maturing within one year	452
Maturing between one and five years	309
Maturing after five years	294
Total Fixed Interest Bearing Investments	1,055

This table reflects the portion of financial assets exposed to changes in interest rate risk. For disclosure purposes fixed-interest bearing assets are included in exposures to both price and interest rate risk. In addition to the interest-bearing securities detailed in the table above, the Fund holds investment cash of €0.2bn. These assets are interest-bearing and the future cash flows from these assets will fluctuate with changes in market interest rates.

Interest Rate Risk Management
The Agency has regard to the possible effects of a change in interest rates on the fair value of interest-bearing financial assets when making investment decisions.

(b) Credit Risk
Credit risk is the risk that the Fund would incur a financial loss if a counterparty failed to discharge its obligations to the Fund.

Credit Risk Exposure
The main credit risk to which the Fund is exposed arises from the Fund’s investments in cash and debt securities. The Fund’s assets are valued at fair value which reflects the market assessment of the likelihood and estimated impact of default. Credit risk is therefore primarily managed by reference to market price risk. The Fund is also subject to counterparty credit risk on trading derivative products, cash and cash equivalents.

The maximum exposure to credit risk at 31 December 2014 is the carrying value of the financial assets as set out below.

	2014 €000
Cash and Cash Equivalents	1,689
Corporate Debt Securities	1,183
Long Term Receivables	360
Accrued Income from Investments	13
Derivatives	6
Total	3,251

Credit Risk Management
The objective of managing credit risk is to minimise the impact of counterparty default on the Fund’s financial assets. The Fund, aims to mitigate its counterparty credit risk exposure by monitoring the size of its credit exposure to, and the creditworthiness of, counterparties including setting appropriate exposure limits. Counterparties are selected based on their financial ratings, regulatory environment and specific circumstances.

The following details the risk management policies applied to the financial assets exposed to credit risk: For interest-bearing securities the credit rating of the issuer is taken into account when credit limits are set, to control the exposure to the Fund in the event of default. Investments are made across a variety of industry sectors and issuers to reduce credit risk concentrations.

Derivative financial instruments generating credit risk arise from the Fund’s forward foreign exchange contracts and cross currency swap contracts. The Fund’s forward foreign exchange contracts were entered into only with approved counterparties within defined limits. In order to mitigate the credit risks arising from derivative transactions, the Fund in some cases, enters into Credit Support Annexes (CSA) with its market counterparties. CSAs require the posting of collateral by counterparties in specified circumstances.

Forward foreign exchange contracts are settled through Continuous Linked Settlement (CLS) where trades are pre-matched ahead of settlement date limiting the risk of settlement failure. The Fund’s Global Custodian, Bank of New York Mellon, holds the Fund’s securities in segregated accounts, where possible, minimising the risk of value loss of the securities held by the Global Custodian. In the, event of its failure, the ability of the Fund to transfer the securities might be temporarily impaired. The Fund’s Global Custodian is a member of a major securities exchange and at 31 December 2014 held a Moody’s credit rating of A1. The Global Custodian’s credit rating is reviewed regularly by the Agency.

At 31 December 2014 cash was held at the Central Bank of Ireland (€176m) and with the Global Custodian (€63m).

(c) Liquidity Risk
Liquidity risk is the risk that the Fund will encounter difficulties in raising cash to meet its obligations as they fall due. The primary source of this risk for the Fund arises from the value of the Fund’s commitments to unquoted investments and loans and receivables (Note 10(b)) and ongoing operational expenses.

Liquidity Risk Management
The Agency monitors the Fund’s exposure to liquidity risk by regularly monitoring the liquidity of its investment portfolio and holding appropriate levels of liquid assets. The Fund held highly liquid assets amounting to €0.2bn as at 31 December 2014, comprising cash and cash equivalent assets.

The Fund also mitigates its exposure to liquidity risk through investment in assets that are readily realisable at low transaction costs and within a short time frame. At 31 December 2014, the Fund held €5.0bn of readily realisable assets.

15. Subsequent Events

On 19 March 2015 €1.6bn was transferred to the Exchequer from the Directed Portfolio as directed by the Minister of Finance. Apart from the ongoing formal transfer of assets as outlined in Note 4(b) there were no other significant subsequent events impacting the Fund as at 31 December 2014.

16. Approval of Financial Statements

The financial statements were approved by the Agency on 26 May 2015.