Denmark’s giant statutory pension fund ATP posted its highest half-year return in five years in the first six months of 2016, gaining 14.6%.
The return – recorded by ATP’s investment portfolio – was aided by the fund’s decision to increase its exposure to interest rate risk, according to CEO Christian Hyldahl.
The pension fund’s overall assets grew to DKK748bn (€100bn) by the end of June from DKK759bn at the end of December, according to its interim report. Within that, its investment portfolio – which consists of its bonus reserves – rose to DKK112bn, from DKK100bn.
European financial markets saw equity gains and moderate increases in interest rates in the first half of this year, ATP said, while interest rates in the US had ended the period around their starting level.
Although the US and European economies were showing positive momentum, interest rates remained extremely low, it said.
Hyldahl said: “While this is positive from a growth perspective, investors will be faced with the challenge of continuing to generate the same high returns in the quarters and years ahead.
“However, we still have leeway to take return-generating risks, but we will do so based on an extremely disciplined approach to both portfolio construction and risk management.”
Hyldahl told IPE: “In the first half year we have been able to increase the overall risk levels and have done that by increasing the interest-rate risk factor.”
The investment portfolio’s exposure to interest-rate risk rose to 35% by the end of June, from 25% at the end of December. Its allocation to the equity risk factor contracted to 44% from 50%.
The allocation to the inflation risk factor grew to 12% from 9%.
ATP said the risk budget for its investment portfolio had grown in the first half as a result of the increase in its resources.
While it had simultaneously increased risk in the period, the risk usage as a proportion of the budget had in fact decreased, data showed.
“We are only utilising about 60% of our risk budget now,” Hyldahl said. He added that it was better to retain some leeway in order to avoid potentially having to decrease risk in a falling market.
ATP said the first half return on its investment portfolio had been driven by positive returns achieved across the portfolio, with the largest being DKK4.1bn from listed Danish equities.
Private equity, listed international equities and credit investments had also contributed high positive returns, it said.
“This is the strongest six-month return in five years – something for our members to celebrate,” Hyldahl said.
The majority of ATP’s assets belong to its hedging portfolio which consists of bond-based instruments designed to protect the pension guarantees it makes, and this allows it to effectively gear the investment in its smaller investment portfolio.
This makes it hard to compare ATP’s investment portfolio returns with those of other pension funds.