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IPE special report May 2018

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Inflation hedging, commodities hit fourth-quarter return at ATP

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Denmark’s statutory pension fund ATP suffered a big loss on investments in the fourth quarter of last year, which cut the return it made over the rest of the year by nearly 40%, dragging the full-year return down to DKK5.36bn (€720m), or 6.5%.

The year before, 2013, the fund reported a 17.9% return.

The 2014 return – before tax on pension savings returns – was 38.6% lower than the DKK8.73bn return posted for the first nine months of the year alone.

In its annual results statement, ATP said its investment portfolio made a DKK3.38bn loss in the fourth quarter.

Carsten Stendevad, chief executive, said: “Investment activities generated a return of DKK6.1bn – before both expenses and tax – with most of ATP’s investments performing well.

“Exceptions were oil investments and the long-term hedging strategy against rising inflation, which produced negative returns.”

Inflation hedging activities alone – part of the pension fund’s inflation risk class within its investment portfolio – lost ATP DKK5.9bn over the year.

ATP said a sudden rise in inflation, which would water down the buying power of pensions, was a significant risk for the scheme’s pensioners.

“Therefore, ATP has bought protection against rising inflation since 2009,” it said.

This insurance strategy consisted of inflation caps and swaptions, it said.

“The big fall in inflation and bond yields with a long time remaining to maturity affected values very negatively,” it said.

However, within the inflation risk class, DKK1.7bn and DKK1.9bn returns on property and infrastructure, respectively, helped reduce the loss for that category to DKK2.8bn.

The commodities risk class ended the year with a loss of DKK2.0bn, with the portfolio consisting entirely of oil bonds and oil-related financial instruments.

Over the year, the oil price fell to around $55 a barrel from $95.

Equities generated DKK8.5bn for the pension fund during the year, and the credit risk class produced a return of DKK776m.

ATP’s investment portfolio is only around 20% of its total assets, with the vast majority invested in the hedging portfolio, designed to underpin the yield guarantees it gives its members.

This hedging portfolio – consisting mainly of bonds and related instruments – ballooned in 2014 as market interest rates dwindled and in some cases went below zero.

Including the hedging portfolio, ATP made a total return over the year of DKK138.3bn, or 23.3%, on total assets, which grew to DKK823.6bn by the end of 2014, from DKK677.5bn.

Looking ahead to the full 2015 year, ATP said it was applying a new long-term target.

This has been set at 7% of bonus potential at the beginning of the year, it said, equivalent to just over 9% before tax and expenses.

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