DENMARK – Denmark’s giant ATP pension fund managed to boost its year-to-date profits by 100% on the back of strong investment returns on domestic equities and high-yield bonds and loans.
The ATP group reported a profit of DKK7.8bn (€1bn) for the year to September, up from the DKK3.9bn profit posted for the first half.
Investment activities produced a profit of DKK8.8bn, or 11.9%, up from DKK4.4bn, or 5.9%, at the first-half stage.
Hedging activities generated a profit of around DKK700m.
Henrik Gade Jepsen, CIO at the fund, told IPE: “The story has been going on in the first half and the third quarter that Danish equities and credit have been very good and steady performers.”
Danish shares were up 27% in the first three quarters, with more than half of that return seen in the third quarter alone, he said.
Meanwhile, investments in the credit risk class – which consists of high-yield bonds and loans to credit institutions and funds – had given a more-or-less steady rate of return over the year so far, he said.
Credit risk generated a return of DKK3.5bn, or 7.6% in the first three quarters, with high-yield bonds returning 12.7% and loans producing 4.9%.
Overall, four of ATP’s five risk classes making up the beta portfolio ended September with positive year-to-date returns.
Interest rates – which had by far the heaviest allocation, with DKK159.4bn of assets – returned 1.5%, while equities produced 7.1%.
Inflation – which includes index-linked bonds, real estate, infrastructure financial contracts and hedging strategies – produced 2.4%.
Commodities made a 2.4% loss.
Gade Jepsen said the results proved ATP’s investment strategy was resilient.
“What we have shown is that we have a robust approach,” he said. “We have generated positive returns for 15 quarters in a row now.”
In pensions, it is important to produce good stable results and, above all, avoid big losses, he said.
“You always have to adjust to the environment, but what we are doing right now is investing quite conservatively,” he said. “We are not using our entire risk budget.”
He said it was inappropriate to do so in the current environment, where expected risk-adjusted returns were quite low.
Looking ahead at factors that could affect full-year results, ATP said there was major uncertainty in the financial markets and growth seemed likely to remain subdued.
It said both supervisory and executive boards still though it important to keep significant risk diversification in the portfolio to deliver positive performance.
The return on hedging activities for the first three quarters of DKK33.3bn offset the DKK25bn increase in the value of pension liabilities, ATP said.
After tax this resulted in a DKK673m profit on hedging activities.
The increase in liabilities was mostly the result of falling interest rates.
ATP said it had decided not to use the altered yield curve for pension liability valuation, introduced by the Danish Financial Supervisory Authority in June this year.
“In ATP’s assessment, the yield curve used by ATP still better reflects ATP’s long-term liabilities than the general yield curve,” it said, adding that the risk from its own yield curve was hedgeable.
However, if it had used the FSA’s alternative measure, ATP’s bonus potential would have been DKK46.2bn higher than the actual DKK82bn, it noted.
Total assets increased to DKK790bn at the end of September from DKK779bn at the end of 2011.