Avoiding energy plays

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  • Avoiding energy plays

Nina Roehrbein speaks with Anders Svennesen, deputy director of pensions and investments at Denmark's ATP; Philip Latham, pension fund manager at Clwyd in the UK; and Jaime Martinez-Gómez, CIO at Spain's Fonditel, about how they How do yoget exposure to commodities?


Anders Svennesen, ATP
• Danish labour market supplementary pension
• Invested assets: DKK570bn (€76.7bn)
• DB scheme
• Date established: 1964

ATP's investment approach is based on a risk factor model and two different portfolios: an absolute return-seeking investment portfolio and a hedge portfolio.

The hedge portfolio hedges the interest rate risk of our liabilities, which can be done using interest rate swaps or long-dated government bonds. If the hedge is implemented on a funded basis, the investment portfolio uses any excess liquidity. In addition it can use derivatives.

The investment portfolio has five different risk classes: interest rates, credit, equities, inflation and commodities, most of which are managed in-house.
We invest 10% of the risk of our investment portfolio in commodities and we exclusively invest in oil.

To meet the balance sheet requirements set out by the Danish regulator, our exposure to oil takes place through investments in structured bonds, which are linked to a commodity index. Rather than using the standard Goldman Sachs Commodities index (GSCI) we have created our own in-house indices in order to achieve the desired exposure on the curve.

We started to invest in oil mainly to gain diversification. We have looked at various ways and forms of commodity investments, for example, metals and other energy sources such as gas.

However, as oil is the biggest inflation driver in western economies and it gives the best diversification in case of geopolitical crises, we came to the conclusion that an exposure to oil would give us the best portfolio properties. Nevertheless, we continue to look at other types of commodities.

Since we started to invest in oil in 2006, the performance of the commodities portfolio has been good. Things may have been different if we had just opted for an exposure through the GSCI. However, we run different strategies at different points in time, depending on the overall markets. Furthermore we use insurance strategies to avoid big draw downs, which helped us obtain a positive return in 2008.

The portfolio has also fulfilled our expectations in terms of diversification.

One of our long-term goals was to have a 10% exposure to commodities and we have had a similar allocation to that target since 2006. We believe it is appropriate for our scheme and there are no plans to change this strategic goal.


Philip Latham, Clwyd
• Local government pension fund
• Invested assets: £1.1bn (€1.4bn)
• Members: around 30,000
• DB
• Funding level: 72% (2010)
• Date established: 1974

Our main exposure to commodities - 4% of the portfolio - takes place through a benchmark approach. We achieve a range of exposure to energy, industrial metals, precious metals and agriculture through an equally weighted version of the Goldman Sachs Commodity index (GSCI).

When we first started to invest in commodities in 2007 as a separate asset class, initially with 2%, we not did want to invest through the main GSCI because for us it was too heavily weighted towards energy.

We are looking at commodities as part of an inflation hedge but due to the challenging fundamentals - increasing demand but falling supply - we hope it will generate some alpha for us.

The index sits within our portfolio of real assets, which in addition to commodities contains property, infrastructure as well as timber and agriculture.

Driven by the obvious alignment and correlation between timber and our liabilities, the fund started to invest in timber in 2007 through two fund managers within our property allocation. However, following a fundamental review of the pension fund in 2010, we formally recognised timber/agriculture as a separate asset class, allocating 2% within real assets. At the moment, we are looking to make some additional allocations to agriculture but the capital we plan to invest will probably amount to less than 1% of our overall portfolio.

Furthermore, we have some exposure to commodities through our global tactical asset allocation managers. Depending how they are run, some of the currency plays inevitably have an exposure to the asset class.

We also hold a fund of hedge funds in our investment portfolio, which again will hold some additional, but relatively small, exposure to commodities.

To date we have been satisfied with the performance of our equally weighted index because it has outperformed both commodities benchmarks - the GSCI and the Dow Jones index - since inception. We review our asset allocation every three to four years.  At our next review, due in 2013 or 2014, we will look at our commodities portfolio again.
Most of the day-to-day risk management is left with our fund manager. We have tried to minimise the risk in our commodity investments by avoiding being dominated by energy and the volatility that it brings with it.


Jaime Martinez-Gómez, Fonditel
• The pension fund of Telefonica de España and other Spanish companies
• Invested assets: €4bn
• Members: 71,000
• DC
• Date established: 1992

The long-term benefits of commodity investments differ substantially between sub-asset classes, so we have separated our commodity investments into four sub-asset classes - gold, oil, agriculture and the rest of commodities.

When we started to invest in commodities four years ago we had a broader exposure through a general commodities index. However, two years ago we decided to invest in gold and agriculture only.

By giving us a different approach than our other investments, those two fit into our portfolio. They work well in the very long term and hedge our portfolio against some of the scenarios that we feel are likely to happen. Gold, for example, has worked very well over the last four years because one of the negative scenarios we anticipated arose.
Agriculture reflects the growing global demand for grains and meats, as the average income in emerging markets increases.

Gold and agriculture should not be part of our long-term strategic portfolio because they are basically beta and contain the same risk factors that we already have in the portfolio. Oil is dependent on external factors such as geopolitics and we do not really want to play that theme.

Therefore the other two sub-asset classes only appear when there is a tactical bet and then only with a much smaller weighting.

We get exposure to gold through listed futures, while over-the-counter (OTC) derivatives enable us to invest in agriculture with the weighting we want.

We have also analysed other investment vehicles such as indices and exchange-traded funds but found that listed futures and OTC derivatives were the most efficient instruments for gold and agriculture respectively.

The returns of our gold and agriculture allocations have been much more positive than those of other risky asset classes we invest in.

With an allocation of 5% to commodities, our exposure is probably higher than many other Spanish pension funds. Gold is not an asset class you typically find in other Spanish funds. They might have an allocation to commodities via an index but it would probably not exceed 1-2% of their portfolio.

We recently reviewed our weightings and are happy with them. They are likely to change
only when there is a significant price movement in either gold or agriculture. If not, we expect to keep this exposure at least until the end of the year.

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