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Day of reckoning will follow expansive monetary policy, ATP CEO warns

ATP, Denmark’s DKK800bn (€107bn) statutory pension fund, remains concerned about the negative fallout bound to follow the current period of quantitative easing and historically low interest rates, even though it is has revamped its investment portfolio in part to prepare for the consequences, according to chief executive Carsten Stendevad.

In an interview conducted after the pension fund published its first half results but before Stendevad announced his resignation, the chief executive told IPE: “We still have the same core concern that monetary policy has driven up all prices and the day of reckoning will come.”

ATP’s main argument behind its current investment approach is that the very expansionary monetary policy adopted by central banks has affected not just the bond markets, but all markets and driven up valuations, he said.

“That’s a good thing, but we always try to make a profit from fundamentals rather than assistance from the central bank,” he said.

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The correlation of returns across asset classes has also continued to be a concern, he said.

“We are a very broad investor, using a risk-parity approach, but if you have a situation where diversification of returns is being suspended, this gives you cause to wonder what will happen on the way down,” Stendevad said.

Quite when the day of reckoning would come was uncertain, he said.

“We have different scenarios for that, but we have seen central banks pushing it further and further out,” he said.

Because these consequences would eventually transpire, he said, it remained important for ATP’s investment portfolio to retain its hedge against long-term inflation, even though this was not something that was clearly needed in the short-term.

“But it is very important for us strategically, to protect the fund against an outcome that would be very painful for our membership,” he said.

Even though ATP’s portfolio of long-term hedging strategies against inflation increases, which consists of swaptions, made a loss of DKK3.5bn in the first half — the investment portfolio’s biggest loss in the period — these instruments would be kept, he said.

“We’re very calm about it because this particular exposure is very different — it’s a strategic decision to have this insurance,” he said.

Stendevad said ATP was very pleased with its overall performance in its return-seeking investment portfolio in the first half, as well as the fact that the pension fund’s administration costs have kept coming down.

“In our hedging portfolio, we had a massive return, and that was offset by our rise in liabilities,” he said.

ATP’s assets are divided between an investment portfolio, which consists of its bonus potential and amounted to DKK96.9bn at the end of June, and a much larger hedging portfolio consisting of long-term fixed-income instruments which was worth DKK703.2bn.

ATP as a whole made a net loss on its activities in the first half of DKK4.3bn because of the DKK9.9bn provision it set aside for an estimated increase in life expectancy among its membership.

The hedging portfolio alone made an overall loss of DKK700m despite its investment instruments generating DKK92.5bn, since this was less than the increase in provisions for the guaranteed pensions of DKK93bn.

ATP said it had been continuing to work on lowering administration costs, and now expected them to dip to DKK52 per member for the full 2016 year, down 9% from 2015, and 24% lower than they were in 2012.

“It is basically about process improvements, IT systems, making them more efficient and in our development costs, keeping them very, very focused,” Stendevad said.

Commenting on the new risk-factor approach ATP adopted for its investment portfolio at the beginning of this year, as opposed to the system of risk classes it had used for several years before than, Stendevad said the approach was now completely integrated and working very nicely.

Asked whether Brexit had affected ATP’s investment environment, the pension fund chief said that since the referendum result, which came shortly before the end of the first half for reporting purposes, the investment portfolio had in fact performed very strongly.

“If you had asked before Brexit, we would have expected a negative impact on our portfolio, but the opposite has been true with both stocks and bonds performing better than expected,” he explained.

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