Here's How This $100 Billion Fund Is Bracing for Inflation Wave

“Nobody knows exactly when it will happen.”

The words are Carsten Stendevad’s. The chief executive officer of Denmark’s ATP fund says that underestimating the risk that inflation will suddenly make a comeback is not “prudent.” Experience suggests it will return, even if there’s a considerable time lag.

“Most people know that despite having the most expansionary monetary policy in the history of the world, there’s nothing to suggest inflation will be higher tomorrow,” Stendevad said in an interview in Copenhagen. “However, it will be an historical anomaly if an expansionary monetary policy of this scope doesn’t lead to high inflation at some point in time.”

Carsten Stendevad

Photographer: Jens Honore/ATP

With oil down about 70 percent since a 2014 peak and a slower economic cycle keeping consumer price growth sluggish, investors have grown accustomed to stagnant inflation. In Germany, Europe’s largest economy, inflation has averaged just above 1 percent since the end of 2008. In the U.S., prices grew a mere 0.1 percent in 2015, compared with roughly 3 percent in the two decades before the global financial crisis.

But there are some signs things are changing. In Denmark, where ATP is based, investors last month offered to buy twice the amount in inflation-linked bonds offered by the government in an auction. In Germany, the 10-year break-even spread has narrowed as the difference between nominal and inflation-linked bond yields gets smaller.

Aurelija Augulyte, a macro strategist at Nordea Markets, says she thinks “inflation in the markets is under-priced.” What’s more, “inflation is needed for normalization, and that is not a good scenario for the U.S. dollar going forward,” she said.

ATP divides its fund into a so-called hedging portfolio -- by far the larger part -- and an investment portfolio, where it takes on more risk. In the latter, ATP delivered a pre-tax return of 17.2 percent last year, with its equity and inflation risk assets performing best. The fund is also shifting its strategy to a factor-based approach, whereby assets are split into risk categories.

Stendevad says ATP’s main scenario is not that there will be a sudden surge in inflation. “But it’s part of the many investment scenarios we’re considering.” The big question is whether “this historical pattern will play out.”

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