Friday 9 December 2016

Dolmen put €3m cash into German bonds to cut risk profile

Broker noted the added uncertainty attached to Irish banks during 2010

Published 27/01/2012 | 05:00

Dolmen chief Ronan Reid
Dolmen chief Ronan Reid

DOLMEN Stockbrokers put more than €3m of its cash into German bonds during 2010 as the problems in the Irish banking sector worsened.

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The broker's accounts for 2010, which have just been filed, show the directors made a "strategic decision to place €3.28m of the group's €6.3m cash and liquid assets in AAA-rated German government treasury bills held for trading at fair value".

Speaking yesterday, company chairman Ronan Reid played down the move, but acknowledged the added risk that was attached to the Irish banks during 2010.

"It would be normal for us to invest in different products and if there is a small chance of there being a problem in one area, even though it's a very small chance, we have a duty to our clients to invest in areas where there would be an even lower risk of there being an issue."

Mr Reid added the investment in AAA-rated bunds (German bonds) should not be taken as a sign of concern in the banks, but rather was required to fulfil an internal policy that requires the firm's portfolio to have a weighted average credit rating of AA to AA-.

The move to bunds came during a year that saw Dolmen book a loss after tax of €2.47m, down slightly on 2009. Turnover was off marginally at €12.38m.

At an operating level the firm narrowed losses from continuing operations by some €900,000 to €1.66m.

Despite the loss, the firm's balance sheet remained debt-free. In addition to the €6.3m in cash and liquid assets, Dolmen had €4.2m in financial assets. Net current assets slipped €1.8m but remained above €12m. The company cut its staff numbers to 105 from 117, cutting the wage bill by more than €500,000. In 2011, income was up 5pc year on year.

ALYSIS

THE decision by Dolmen to invest heavily in top-rated German bonds in 2010, as opposed to their equivalents, demonstrates the importance of having the AAA rating Ireland waved goodbye to long ago.

Throughout the financial crisis, there has been a lot of hand-wringing about how we shouldn't pay so much attention to the ratings agencies, but that misses the point.

The market pays close attention to ratings and moves accordingly. Like most investment firms, Dolmen must have a portfolio with an average weighting of AA to AA-. Therefore it needed the AAA-bunds to beef up its portfolio's weighting -- Irish bonds were not acceptable.

There may well be criticism of Dolmen for 'not wearing the green jersey' when the country needed support but look at it this way: if you had trusted Dolmen with your savings and lost everything because it didn't have a diverse portfolio of top-rated securities, then how would you feel?

Every firm in the investment business has a fiduciary duty to protect their clients' money. What Dolmen did was replicated by many, many firms. Flawed as the ratings agencies may be, don't underestimate the need for reclaiming that top-notch rating.

Irish Independent

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