Denmark’s DKK705bn (€94bn) statutory pension fund ATP says its new risk-factor-based investment portfolio approach, unveiled in its 2015 annual report, increases its investment flexibility and provides it with a better understanding of risk.

The work it has done on identifying the risk factors at play behind its investments and those available in the market has, for example, already led it to reject some infrastructure deals on pricing grounds.

Carsten Stendevad, chief executive of ATP, told IPE: “In the big picture, this gives us not only a better understanding of risk but also more investment flexibility.”

When approached with investment propositions, the pension fund can now more accurately compare the opportunity with other investments by using the risk-factor method, he explained.

“This enhances our ability to make a proper apples-to-apples comparison across different asset classes,” Stendevad said.

ATP said the new construction was particularly useful for alternative investments in strengthening the understanding of underlying risks.

Using risk factors in composing the portfolio also allows it to determine the expected return on an investment by comparing it with the return on other assets with the same underlying risks, it said.

Carsten Stendevad CEO - ATP

“This is particularly relevant for alternative investments where the required returns on investments in, say, complex infrastructure investments are not easily quantifiable,” it said.

Stendevad  added: “This approach generally makes us more comfortable with the more illiquid investments.”

He said these investments were composed of many elements, with the more complicated deals involving at times all four categories of risk, and ATP’s investment team could now use the new technique to decompose the risk into these individual risk types.

ATP does not operate with budgets for particular asset classes, like real estate or infrastructure, he said. 

“If we can get it [the risk-factor exposure] a better way, we will; it all depends on the price,” Stendevad said. “In the end, what we will buy will be the assets that give us the best risk-adjusted returns. We’ve done few infrastructure deals in the last few years, simply because when we decompose it, we find it too expensive.” 

The report points out that real estate is an asset class that is exposed to all four of the risk factors ATP now considers.

While this had been known conceptually, Stendevad said, the work has thrown up the concrete discovery that as much as half of the portfolio’s current risk from the interest rate factor comes from its infrastructure and real estate portfolio.

“Usually you would think it comes from bonds, so this is quite an important insight,” he said. This was known before in theory, but until now, it had not been quantified.

ATP’s alternative risk premia with new long-term guidelines

Denmark’s labour-market supplementary pension fund (ATP) has announced the new long-term guidelines for its investment portfolio and said that while the change was not radical, the new mix is less weighted to rates and inflation factors and more towards alternative risk premia.

The pension fund has set the guideline as part of its portfolio construction overhaul, which focuses on a set of four underlying risk factors that assets represent, rather than grouping each of those assets into one of five risk classes.

The guideline only concerns ATP’s investment portfolio, or the return-seeking part of its overall assets, which consists of its bonus reserves worth approximately DKK100bn (€13.4bn).

The bulk of the pension fund’s assets are held in its hedging portfolio, designed to back the pension guarantees it gives.

The new guideline allocates 35% of its investment risk to each of the equity and interest-rate factors, and 15% each to the inflation factor and other factor groupings, according to the annual report.

It said the guideline should be seen as a long-term anchor for risk allocation, and that the actual portfolio allocation might deviate from the guideline at any given time depending on market conditions. 

Carsten Stendevad, chief executive of ATP, told IPE: “While the portfolio construction approach is new, the changes in relative risk weights are not dramatically different.

“Compared with the old guidelines, it means less risk weights to interest rates and inflation factors, about the same to equity, and more to other premiums, which includes illiquidity premiums and liquid alternative risk premiums.”

Emphasising that the guideline did not have to be adhered to in the short term, he said ATP was actually deviating from the guideline by quite some distance at the moment.

“Right now, we have 22% of our risk in the interest-rate factor and half in equity,” Stendevad said.

“In a normal market environment, we would expect to be much closer to the guidelines but, given where rates are now, this is where we are.”

The new guideline represents risk weighting and thus cannot be seen in terms of traditional asset allocation percentages, and does not indicate proportions of capital, he said. As an example, he pointed out that equities were four times riskier than bonds.

Stendevad unveiled some details of the new investment strategy during his keynote speech at last year’s IPE Conference & Awards in Barcelona.

Rachel Fixsen