Biggest Danish Fund Readies for Rate Shock as Exit NarrowsPeter Levring
Denmark’s biggest pension fund, ATP, says it’s willing to sustain losses in the short term as part of a bet that central banks will need to reverse an unprecedented period of monetary easing.
The fund, which manages about $115 billion in assets, is preparing for higher rates even as central banks overseeing the world’s biggest economies signal they’re committed to historically lax policy. For ATP, the goal is not to be part of the crowd of investors heading for the door when markets exit securities that rely on low rates to stay profitable.
“We’ll continue to protect against interest rate increases and if that happens, the effect will be substantial,” Chief Executive Officer Carsten Stendevad said in a phone interview. “There could naturally be some costs associated with that before it comes through.”
The world’s biggest currency and rate markets are being dragged deeper into uncharted monetary territory as President Mario Draghi fuels speculation the European Central Bank is ready to resort to quantitative easing and Federal Reserve Chair Janet Yellen signals she won’t raise rates while labor markets remain weak. While these policies have driven down rates, ATP says it’s safer to prepare for an about-face from policy makers then to get comfortable with cheap money.
The strategy has so far generated losses. “Insurance strategies against interest rate increases made a negative contribution” to ATP’s result in the second quarter, it said Aug. 25.
ATP divides its investments into a hedging portfolio to match about 540 billion kroner ($96 billion) in pension liabilities, and an investment fund that allows for more speculative bets in an effort to boost returns.
The investment fund lost 3.3 billion kroner in the period ending June on hedging strategies in its inflation portfolio after yields fell on long-dated European bonds, ATP said. In its rate portfolio, it made 2.3 billion kroner after correctly betting that German government bond yields would decline, its report showed.
The yield on benchmark 10-year German debt eased to 0.9 percent today, compared with about 1.9 percent at the beginning of 2014. German bonds with maturities of one year and longer returned investors 7.1 percent this year, according to data compiled by Bloomberg.
ATP said total profit rose to 7.68 billion kroner in the first half, from 1.32 billion kroner a year earlier after returns on its stock portfolio soared.
“Our investment approach is highly diversified to perform across risk scenarios, including scenarios that may not appear probable in the near-term,” Stendevad said. “In the investment portfolio, we have protection against interest rate increases over the coming decade: if interest rates should start rising a lot, these insurance strategies will deliver high returns.”
Since Stendevad, a former Citigroup Inc. banker, took the helm at ATP last year, the fund has made a number of strategy adjustments to tackle post-crisis markets and a more onerous regulatory environment.
Earlier this month, Stendevad said ATP will no longer rely solely on bonds with maturities of 30 years or longer to back its pension liabilities after liquidity in that segment sank. That followed a move in October to adjust the discount curve ATP uses to calculate the value of its future liabilities. The curve fixes the rate at 3 percent for maturities of 40 years and longer, a move ATP estimated at the time would cut its interest rate risk by about 25 percent.
So far, steps taken by the fund can be seen as a bellwether for the pension and life insurance industry, according to Bert Lourenco, head of EMEA rates at HSBC Bank Plc.
“To its credit, ATP’s prudent approach has generated stable positive returns over most of the last few years,” he said in an Aug. 15 note.
Stendevad says ATP will continue to strive for more flexibility in its investment strategies to allow it to respond to shifting markets.
“It has been important to increase the flexibility in how we can hedge the pension guarantees,” he said. “The important thing is that we’ve already put that increased flexibility to work.”