The new captain of Denmark’s DKK759bn (€102bn) statutory pension fund ATP intends to put private equity managers under the microscope to address a perceived imbalance in control.
Far from changing tack on ATP’s investment strategy in order to navigate 2017’s many uncertainties, Christian Hyldahl told IPE he wants to deepen the fund’s ‘all-weather’ portfolio approach.
“I truly believe that is the right way to run a portfolio in the uncertain times that we’re in, and I don’t believe in a very active, tactical asset allocation,” Hyldahl said.
He was head of the asset management division at Nordea for two years, following four as CIO, before officially succeeding ATP’s last chief executive Carsten Stendevad on 1 January. He cited his experience at the Nordic financial services giant as demonstrating the success that an all-weather portfolio can achieve.
“I think there are limits as to how successful you would be with active, tactical asset allocation,” Hyldahl said. “What we do is more top down, in the sense that you construct a portfolio in a robust and balanced way, and then it is bottom up in that you make sure that the asset pricing is at the right level.”
At the beginning of 2015, ATP officially started applying its new risk-factor-based portfolio construction approach to its DKK100bn investment portfolio that consists of its free reserves, or bonus potential. It was designed to fare well in all market environments, distilling assets into four risk factors — interest rates, inflation, equity, and ‘other factors’ — and then using these as building blocks for the portfolio.
The building blocks are used to give ATP full consistency between its asset pricing approach and risk management approach, Hyldahl said.
“We will be continuing this this work, both on the construction side and with the bottom-up approach,” he said. “It is exactly what has been developed in ATP, but it has not been fully implemented yet and we will continue to work on this.”
The next stage was to refine the way the four factors are modelled, Hyldahl continued, with a particular focus on ‘other risks’.
Private equity under scrutiny
“We need to refine the illiquidity risk aspect, and how we price this risk when we invest in private equity,” the CEO said. “Basically you give a commitment to a private equity fund, but they have the option to deploy the money at their discretion over a period of time.
“What is the value of that option, and how much return should we get for giving the manager the freedom to deploy that money when they decide? There is a lack of control in the flexibility we give to the manager, and that has a price.”
Similarly, extension risk needed to be taken into account with private equity fund investment: the chance that the investment would continue for longer than anticipated because holdings could not be exited within the standard 10-year timeframe.
“That type of risk is a risk that is on our balance sheet and it seems to be in the favour of the private equity funds. We need to make sure we get adequate return for all these types of flexibility that we grant the managers,” Hyldahl said.
Unlisted assets generated a third of ATP’s overall return for 2016, according to its results released last week.
Asked about the current market environment, Hyldahl said uncertainty would be a “big theme” for this year. However, broadly speaking, he said the uncertainty brought about by Brexit and the change of government in the US was priced into financial markets.
“But it is very difficult,” he added. “It depends on what likelihood you put on some tail events – and maybe some of it you cannot even foresee.”
The CEO continued: “There are too many scenarios to be able to position yourself, so at the end of the day when you line up 10 or 20 large big-effect scenarios, you end up with having to have a portfolio that is very robust and that is the only approach that we can have.”
Protectionism was worrying him, he said.
“Global trade has served the world really well for many years, and maybe the wealth has not been distributed well over 30 years, but overall, global growth has been very high and I think if we start to put up barriers to global trade that would be bad for the global economy,” Hyldahl said.
“I think protectionism is the wrong way to address the unequal distribution of wealth,” he said.
The pension provider posted a 15% gain in 2016.