$100 Billion ATP Fund Refines Risk With New Investment Model

  • ATP seeking board approval on factor-based investment approach
  • Fund says new strategy will improve returns given risk level

One of Europe’s biggest pension funds says standard diversification models are no longer the best way to invest as it plans a major revamp of its portfolio strategy to redefine risk.

ATP, which oversees about $100 billion in assets, wants to do away with the five risk classes it has used in its investment portfolio since 2006 and replace them with a factor-based strategy. The plan, which still needs to be approved by ATP’s board, is due to be presented in all its detail early next year, according to Carsten Stendevad, the fund’s chief executive officer.

“We’re obviously doing this because we think over the long term we’ll get better risk-adjusted returns. Otherwise, we wouldn’t do it,” Stendevad said in an interview in Copenhagen on Monday. The new approach is about “squeezing more returns out of a given risk.”

The plan involves replacing the risk classes into which ATP currently splits its investment portfolio -- credit, commodities, inflation, interest rates and equities -- with four so-called factors. These will be divided into inflation, interest rates, equities and a final bucket simply labeled “others.” The idea is that an asset such as a piece of real estate can be broken down and spread across factors.

“This is a clear refinement in how we think about risk,” Stendevad said. “We don’t care about asset classifications. We care about the underlying risk dynamics. This gives us great investment flexibility. Somebody can come to us and say we have this particular asset. We won’t say we don’t have an appetite for that particular asset. We’ll say, let’s tear it apart.”

The reboot is the latest in a series of measures Stendevad has taken since becoming CEO in 2013, including revamping ATP’s discount curve and reducing its interest rate sensitivity. The proposed switch to factor-based investing will mark a major shift for ATP, requiring a considerable adjustment of the fund’s entire investment infrastructure.

“Every system we have has to be rebuilt for this, all of our risk systems,” Stendevad said. “This has been a very significant effort internally because this now impacts our risk assessment. Every single asset we have on our books is impacted by this, every single decision is a risk-adjusted decision and will flow through this.”

There’s plenty of evidence that some of the world’s biggest investors are struggling to generate returns in the current environment. Norway’s $860 billion sovereign wealth fund revealed a $32 billion loss last quarter, its biggest in four years. Japan’s Government Pension Investment Fund said on Monday a global stock rout in August and September wiped $64 billion off its investments last quarter.

ATP posted a 0.2 percent loss on its investment portfolio in the period after a global market selloff ate into its holdings of stocks, corporate bonds and commodities. It made money on private equity, infrastructure, real estate and long-term inflation hedges.

Given the history, professional investors need to ask themselves whether existing models are still appropriate in the current market climate, according to Stendevad. Even so-called alternative investments may offer a limited hedge if risks aren’t properly assessed, he said.

“Are we really getting diversification? Do we really understand the underlying risk in what we’re starting to buy? There’s danger in thinking that just because you buy something that has a different label, that means you get a different risk.”

Ultimately, Stendevad says all overhauls target the goal of giving ATP the “operating freedom to be long-term investors.”

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