Biggest Pension Fund in Denmark Girds for Global Market Shocks

The head of Denmark’s biggest pension fund said recurring sell-offs of emerging economy assets may increasingly affect global markets as central banks unwind support measures.

The scale of the market rout suggests gains in some asset classes may have been excessive after unprecedented monetary easing distorted prices, according to Carsten Stendevad, chief executive office for ATP, which oversees $112 billion in assets.

“We’ve been strongly encouraged to go out on the risk curve, but we have to go further and further out to make money,” Stendevad said in an interview in Copenhagen. “That makes you worried.”

Exchange-traded funds tracking emerging markets are losing investors at the fastest pace on record, with rate increases by Turkish and South African central banks failing to stem the exodus. More than $7 billion flowed out of ETFs investing in developing-nation assets in January, according to data compiled by Bloomberg.

The declines spread last week after the Federal Reserve said it would further curtail its bond-buying program. The MSCI World Index has dropped 3.8 percent since nearing its all-time high Dec. 31.

‘Hope, Pray’

The “fundamental issue is that central bank policy has to be slowly and gradually removed,” Stendevad said. The challenge is there’s no roadmap for doing that, he said. “We all know it has to happen, we all know that it’s unprecedented, and we all hope and pray that it will be done orderly. We also all know that when you do something on such a scale, so unprecedented, there are risks.”

ATP last week reported a return on assets of 11.9 billion kroner in 2013, led by a 14.5 percent gain in its investment portfolio. Profit before awarding a 2.5 billion kroner bonus to policy holders rose 15 percent, to 11.6 billion kroner. The fund said this year’s results may not be as high even amid signs the global economy is strengthening.

Hilleroed, Denmark-based ATP said improvements in financial markets have been underpinned by central bank policies.

Assets ``have risen so much in value that, the way we put it is, the expected future return, we believe, has diminished,” Stendevad said. That’s “partly because a lot of return came early,” and ATP has “low expectations for the future,” he said.

‘Very Difficult’

U.S. stock futures have had their worst monthly loss in almost two years, as the Fed’s stimulus retreat raises the cost of borrowing. Three rounds of monetary stimulus helped the S&P 500 Index rise as much as 173 percent from a 12-year low in 2009. While the index reached an all-time high of 1,848.38 on Jan. 15, it has slumped about 4 percent since then.

“What happens in financial markets is very difficult to predict, how uncertainty spreads,” Stendevad said. “The emerging market is not a homogeneous entity. Hopefully they can resolve and contain it.”

ATP, into which Danes are required to contribute toward pension savings, said last week it has changed how it calculates its pension liabilities. The fund sold government bonds and other assets to adjust to a new discount curve, cutting interest rate sensitivity of guaranteed benefits by 25 percent, it said.

Hedging Strategy

“The changes in our hedging strategy give us more flexibility while maintaining all the benefits of safety,” Stendevad said. That’s particularly beneficial amid a drop in market liquidity, he said.

“That is something that is of grave concern to a large investor like us,” Stendevad said. One of the side benefits of this is exactly that we reduce our size in certain markets, most noticeably the German bund market.’’

The fund is also pursuing a strategy of pinpointing specific risks within financial instruments that offer better returns, and hedging against the other risks.

“Every time we have a new market, we have to look at what’s needed in this market,” Stendevad said. “In these circumstances, we need to find these pockets of returns.”