At ATP, infrastructure is an asset class in its own right used in order to focus on meeting long-term liabilities, as Shayla Walmsley finds

We have only been investing in infrastructure for a little over a year. It is a relatively new endeavour for us," says Henrik Gade Jepsen, chief investment officer-beta, at Arbejdsmarkedem Tillaegspension (ATP), the DKK438bn (€59bn) Danish Labour Market Supplementary pension fund.

For a novice, the scheme has taken a hard-headed approach to its own expectations of what the asset class can deliver.

Analysts such as Morag Torrance of infrastructure specialist fund manager Capital Partners suggest that infrastructure is a fundamentally different asset class from real estate, despite a common lack of liquidity that makes both classes long-term assets. Yet ATP is not so much concerned with appropriate categorisation according to the characteristics infrastructure broadly shares with other alternative asset classes; rather, it has grouped infrastructure according to risk, specifically the link with inflation - in line with its scheme-wide approach.

"We see infrastructure as an asset class in its own right, though it's in the same broad risk class as real estate because it's inflation protected," says Jepsen.

ATP segments its scheme into five risk categories: government bonds, credit, equities, commodities, and inflation-protected assets comprising not only infrastructure but also real estate and inflation-linked bonds. The latter category indicates fit between infrastructure and pension funds per se but specifically with a focus on matching pension promises in the long term. This has largely been the line taken by Canadian pension funds focusing less on double-digit returns than with paying out in the long term above 5%.

"We're expecting stable, inflation-linked returns," says Jepsen. "It fits well with our overall objective, which is to ensure we can pay out the highest possible pensions in real terms."

In August, for instance, the scheme made a €94m provision - equivalent to 0.25% of guaranteed benefits - in order to meet a modest increase in longevity - slightly lower than those of recent years. At the same time, despite equity returns equivalent to 14.5% (against overall returns of 3.5%) and a 11.5% return on new investments in commodities, the fund predicted likely price fluctuations in bond and equity markets "without any clear direction".

Danish pension funds are way ahead of other Scandinavian schemes when it comes to infrastructure investment.

"What made investing in infrastructure easier for us is that the fact that we don't use traditional benchmarks any more," Jepsen says. "When Denmark moved over to mark-to-market accounting [in 2002] and we hedged our pension liabilities, it followed that you'd have absolute returns, so why would you use a benchmark?"

The switch to mark-to-market accounting is credited with increasing awareness among Danish pension schemes of such issues as funding levels and risk because it sharpened the focus on liabilities as well as assets.

At ATP it meant that Jepsen and his team were able to split the fund into two portfolios managed by different teams and designed to match liabilities and go after absolute returns, respectively.  The split, which came with the 2003 implementation of a dynamic asset allocation strategy directly linked to its reserves, resulted in an alpha portfolio designed to generate returns by taking risks unrelated to those in the beta, which explores general market risks.

"We split the fund into a portfolio that would hedge our liabilities and a return-seeking portfolio," says Jepsen. "The point of the absolute-return investment portfolio is to generate the highest possible risk-adjusted returns so that we can increase the pensions paid out to our members."

In February, the fund began scouting external alpha suppliers as part of a business model and investment strategy to add external sources of alpha aimed at earning €135m for the fund by 2009. 

Just as important, the mark-to-market switch changed the mindset more sharply towards performance proper - rather than benchmark-beating. In practice, says Jepsen, the obsession with benchmarks had often entailed results skewed by arbitrary metrics.

"When you benchmark, you tend to focus on added value," he says. "Often, you find that people do not care about the value of the benchmark, only about beating it. But if you're beating a -20% benchmark by 2% it's still a lousy return."
In other ways, too, ATP has been cautious in terms of its expectations of what infrastructure can deliver.

Minimising risk means, for ATP, keeping well clear of politically sensitive assets and opting exclusively for ‘economic' infrastructure in areas of political and legislative stability.
First, this means excluding such assets as schools, health centres, and sports and community halls - effectively real estate, often organised via public/private partnerships.

"We decided to focus on economic infrastructure only, with no social infrastructure," he says. "We wanted pure exposure to infrastructure - so our interest is transport, utilities, telecommunications infrastructure and ports."

Second, it means investing in mature markets - broader than, say, Finnish scheme VER, which invests only in Europe, but still limited to relatively stable structures.
"We're only interested in the OECD area, because we want to minimise political risk," says Jepsen.

ATP has taken what amounts to a classic trajectory among pension funds investing in infrastructure. Jepsen points out that its primary concern was "to get some investment on the books and a better understanding of the asset class".
Now, just a year in and with a move mooted into direct investment, Jepsen says the scheme will look for the same balanced exposure focused on specific kinds of infrastructure.

"In the first phase, we decided to look for indirect exposure," says Jepsen. "Now we're going into the next phase, which might include direct exposure. We're after reasonably well-balanced exposure to different economic sectors."

In the meantime, although he stops short of proselytising about it, Jepsen claims that the abandonment of benchmarks has effectively liberated ATP to make appropriate investment decisions - and would likely give other pension schemes doing the same thing similar opportunities.

That it makes sense makes it likely to catch on, he says. 
"Will it be a trend? It should be a trend, in my view. It's the logical way in which to look at your investments."