Denmark’s ATP has revealed the final shape of its return-seeking investment portfolio after a long overhaul of its wider strategy including portfolio construction, with the assets now being grouped under four “risk factors” rather than the five “risk classes” it has used since 2006.

The statutory pension fund, which manages around DKK770bn (€103bn) in assets, announced at the 2015 IPE Conference in Barcelona that its DKK100bn investment portfolio would now be separated into “interest rate factor”, “inflation factor”, “equity factor” and “other factors” groupings.

This is a change from the previous construction, which involved five risk “classes” – commodities, credit, inflation, equity and interest rates.

Carsten Stendevad, chief executive at ATP, said: “Since 2006, we’ve thought about risk classes and risk budgets, and that’s been very ingrained in us.

“Over the past two and a half years, we’ve done a major overhaul of how we think about it, how we analyse it.”

ATP splits its assets into an investment portfolio, consisting of its bonus reserves, which are worth around DKK100bn, and a much larger hedging portfolio worth about DKK670bn, which is designed to back its pension guarantees.

The new investment portfolio shape is still a work in progress and will be announced officially with the pension fund’s year-end results in January, Stendevad said.

The strategic changes ATP has been gradually making since 2013, encompassing many areas of its operation, have been prompted by problems facing the fund such as low interest rates, changing diversification patterns between asset types and the significant drop in market liquidity over the last 13 years, he said.

ATP had been concerned that a portfolio construction approach centred around traditional asset classes overestimated the amount of diversification actually achieved.

“We have gone a different way, thinking very intensively about risk factors,” Stendevad said.

The team behind the move had questioned, for example, whether real estate and infrastructure were really very different, or whether they could somehow be broken down into some common risk factors.

“From now on, every single investment we have we decompose it into four risk factors,” Stendevad said.

Commodities are now included within the inflation factor group, while unlisted equities are largely included in the equity factor group but partially in the “other factors” group. 

Index-linked bonds are included in both interest rate factor and inflation factor groups, while corporate bonds fall within the interest rate factor group and the equity factor group.

The “other factors” group is basically a combination of alternative risk premiums in the liquid space – long-short strategies, momentum and low volatility, for example – as well as the pure form of illiquidity premiums, Stendevad said.

ATP has set a pre-tax absolute return target of 9% a year over time for its investment portfolio.

This is based on what the fund needs to achieve in terms of generating returns for scheme members that beats inflation, Stendevad said.

Another part of the investment overhaul is a sharper focus on direct investments.

While the pension fund lacks the scale to invest 100% in-house, it is now thinking hard about which investments it wants to have in-house and how much value it is actually getting from external mandates.

“One of the changes we have made is really in the illiquid space,” Stendevad said.

“We have far fewer funds – we have reduced this by almost €1bn, and that trend will continue.”

From mid-2013 to mid-2015, ATP’s fund investments fell to €7.5bn from €8.7bn, while direct investments – including equity, real estate and infrastructure and structured credit – more than doubled to €6.2bn from €2.8bn, according to data Stendevad showed.

ATP could take direct equity investments by participating in IPOs, he said, or in situations where listed equity is being taken private, for example.

“Today, we have some real estate funds, but, as soon as we can unwind them, we will go over to a pure-play, direct investment strategy,” Stendevad said, adding that the pension fund had already made good headway here.

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