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The $115 Billion Danish Fund That's Mapped Volatility Patterns

It’s a familiar pattern: each quarter sees a bout of anxiety, followed by a period of relative calm.

Once you’ve spotted the repetition, you can position your portfolio to avoid predictable losses and even make money on the highs and lows, according to Carsten Stendevad, the chief executive officer of ATP, Denmark’s biggest pension fund.

“We almost see the same movie replaying itself every quarter,” Stendevad said in a phone interview on Thursday. It’s a recurring “spike in volatility, then calm. We’ve positioned our portfolio so that we can withstand those bouts and sometimes even take advantage of them.”

Zigs and Zags

The first quarter of 2016 started with a selloff in global stocks that saw the Stoxx Europe 600 Index drop 5.3 percent over the first week. Eventually, stocks recovered most of their losses. The index then dropped 2.8 percent over the first week of the second quarter, but has rebounded since.

Stendevad, who since becoming CEO in 2013 has pushed through an overhaul of ATP’s portfolio strategies including a shift to so-called factor-based investing and a revamp of the fund’s discount curve, says his ability to weather today’s nervous markets doesn’t mean he’s comfortable with the situation. Surviving the current climate of excessive monetary stimulus is the main worry.

“I’m very concerned about what these low, negative rates mean,” Stendevad said. “I’m concerned about what they mean for asset pricing. Clearly, they are driving asset prices” and “it’s always a cause for concern when asset pricing is driven more by central bank policy than cash flow generation.”

ATP delivered a 0.4 percent return on its investment assets last quarter, it said on Thursday. The fund targets putting roughly one-fifth of its total assets in its investment portfolio, with the rest reserved for a so-called hedging portfolio designed to cover liabilities.

It made money on bonds, alternative investments and commodities but booked losses on equities and its long-term inflation hedges.

The first quarter proved challenging for many large investors. The Norwegian sovereign wealth fund this week revealed a $10 billion loss for the period, representing 0.6 percent of its portfolio, as it struggled to navigate its way through turbulent markets.

Stendevad said when monetary normalization happens it will inevitably jolt markets, but the question is whether investors should accept a brief shock rather than a prolonged period of asset-price distorting policies.

“Clearly we’re at the limit of what more monetary stimulus can do, particularly in Europe,” he said. “We need to think how fiscal policy and other policies can help generate growth and employment. Monetary policy on its own just won’t do it.”

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