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The majority of funds that use indexation have adopted the indexed Irish Life Consensus Managed Fund (the "Consensus Fund") - (Click here to see the Consensus Fund Fact Sheet). The aim of the Consensus Fund is clear - to produce consistent second quartile returns as measured by the pooled fund survey. This is achieved by mirroring the average asset and country allocation of all the investment managers included in the "league table". There are currently 15 managers in the Irish market included in the league table survey. The Consensus Fund replicates the average split between equities, bonds, cash and property. Having eliminated asset and country allocation risk by adopting the collective wisdom, the fund then pursues index tracking stock selection. This produces a return, which is consistently in line with the average pension managed fund performance over rolling 3-year periods. In more recent times, ILIM has developed the Global Consensus Fund, which allows members to enjoy all the benefits of the Consensus Fund, but eliminates all exposure to Irish Equities. - (Click here to see the Global Consensus Fund Fact Sheet) In order to meet client demands there are also Consensus and Global Consensus Funds available that have no exposure to Property, also the Global Consensus is available with a Currency Hedge.
Indexation - The Benefits
Indexation has overcome the traditional risks associated with active management in the following ways:
- Eliminating Asset Allocation Risk
There is no asset allocation risk within the Consensus Fund as it mirrors the collective wisdom in the industry. We track the asset allocation of the managers (currently 15) included in the Pooled Fund Survey, maintaining the asset mix at all times within +/- 1% of the collective wisdom at asset class level, and within +/- 0.5% at country level to ensure close tracking. This means we avoid the type of bad asset allocation calls often made by individual active managers. Our approach produces much less volatile long-term returns.
- Eliminate Stock Selection Risk
An index fund owns a broad range of securities (equities, bonds, properties etc) across a variety of industries and sectors, thus avoiding the risk inherent in active stock selection. There is consensus among investment theorists that in almost all cases a truly diverse portfolio provides a better risk/return environment than a portfolio of concentrated investments. Passive investment is a time-tested strategy for ensuring that portfolios keep pace with the market and capture the equity risk premium over time.
- Eliminate Style Risk
The Consensus Fund eliminates a specific style bias (Value, Growth, Large Cap, Small Cap) by investing in all markets in a diverse range of styles. This leads to a more effective management of risk and consistency of returns, no matter which style is in favour at the time.
- Indexation - Strength of Returns and Performance
Indexation is all about delivering the market return consistently and predictably. ILIM manage the indexation process to very tight tracking error benchmarks ensuring that the expected market return is delivered consistently. Since inception, taking 5 year rolling observations, the Consensus Fund has met this objective 100% of the time.