Denmark’s ATP is revamping its long-held investment portfolio structure of five risk classes.
The move by the DKK770bn (€103.2bn) supplementary labour-market pension fund is likely to see some classes abandoned.
Under chief executive Carsten Stendevad, ATP has sped up the process of reviewing the risk-class system because of concerns it no longer provides the diversification originally assumed, or the spread of risk that the pension fund now needs.
Stendevad, who took the helm at the fund two years ago, said: “It is quite likely (the) division of risk classes will change in a year.”
ATP’s bonus reserves, worth around DKK100bn at the end of March, make up around 20% of its total net assets, with the bulk of net assets held in the much larger hedging portfolio (valued at DKK671bn), designed to back the pension guarantees the fund makes.
ATP’s bonus reserves are invested in a separate investment portfolio with an absolute return target, which is meant to maintain the purchasing power of pensions in the future.
It is structured according to the principles of risk allocation – a portfolio management approach focusing on a balanced allocation to different risk factors rather than on allocation of capital, with the aim of being better diversified and thereby creating better risk-adjusted accumulated returns.
ATP divides the investment portfolio into the risk classes of equities, credit, interest rates, inflation and commodities.
Stendevad said the system, put in place back in 2006, had served ATP well in the management of its investment portfolio.
“But now we ask ourselves, are those five risk classes really distinct, or are there, in fact, fewer?” he said.
As interest rates have fallen over the last few years, values of bonds, equities and other assets within the five risk classes such as property, have risen simultaneously, a development that suggests the risk categories are not as well diversified against each other as initially thought.
“We do believe in the benefits of diversification, but in the past couple of years, global QE (quantitative easing) and the massive drop in rates has been driving up the prices of almost all assets across ATP’s risk classes,” Stendevad said.
“It’s great on the way up, but if we don’t have the benefit of diversification on the way down, that would be a problem.”
Because of these concerns, he said ATP was now in the process of reassessing, still in the spirit of balancing risk, whether it had the right bucketing in its investment portfolio.
The investment team has been allowing the portfolio to deviate from its current risk-parity approach over the last couple of years because of the way the financial markets are, Stendevad said, adding that this had accelerated over the last year.
“One has to be constantly sceptical and critical of one’s own processes,” he said.
“Looking back, we will probably always say we didn’t get it quite right. For us, it has been a constant process to develop our investment model, and that will continue in the future.”
Stendevad defended ATP’s focus on protecting itself against the impact of sudden increases in inflation over the next 20 years at a time when it is the risk of deflation that is seen as more imminent.
He said a sudden rise in the rate of inflation presented a huge risk to the value of pensions.