The evolution of ATP’s investment strategy
DDF CM Netværksmøde, 12 November 2013
Anders Hjælmsø Svennesen, Co-CIO Investments
ATP facts

ATP is a first pillar pension scheme with 4.8 million members and AuM of EUR 85bn

The ATP pension product consists of two elements

The central element in ATP’s pension product is a life-long
deferred nominal guarantee


Contributions
Strong return generating engine due to full hedging in financial markets
Guaranteed pension
(80%)
Market return
(20%)
The other element is a portfolio yielding market returns
The guaranteed product

80 pct. of new contributions are guaranteed a rate of return corresponding to the actual 30-year interest rate on
safe government bonds
The market product

20 pct. of new contributions are invested in the global financial markets and are not guaranteed
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The guaranteed product
DKK
 Contributions are guaranteed an annual accrual
equal to the actual 30-year interest rate
Contributions / futur e pens ions
 All contributions to the guaranteed product are
converted into promised pensions
Age
 Over a lifetime this will generate high, stable
returns
DKK
20 year+
 Life-long annuity
Members are expected to live, on average,
another 20 years after retirement
Contributions / futur e pe ns ions
 High yearly interest accrual
Contributions
Future pensions
3
ATP’s balance sheet
 ATP has divided the investments into two activities in order to
address the characteristics of the product
Investment activity
Hedging activity
50% Swap
~ 250bn
Liquid assets
 Hedge portfolio
 Enables ATP to generate the promised interest accrual
on the guarantees by using long-dated safe government
bonds and interest rate swaps
Return seeking
portfolio
Free
liquidity
~ 270bn
Market
value of
guarantees
~ 500bn
50% Bonds
~ 350bn
BR
~ 250bn
~ 90bn
 Hedges the interest rate risk inherent in the guarantees
 Investment portfolio
 The objective is to achieve returns, in addition to the guarantee, in order to maintain the purchasing
power of the promised pensions and give ATP’s members a share in the overall real economic growth
 The risk budget depends on the size of the bonus reserves (BR) in order to minimize the risk of
insolvency
 It is a levered portfolio with access to liquidity from the hedge portfolio
4
Hedging activities
 The hedging is done by matching interest rate
risk in different maturity buckets
 All guarantees above 30 years are hedged with
30-year instruments
 The hedge portfolio consists of interest rate
swaps and German and Danish government
bonds
Instrument
Weight
Danish government bonds
15%
German government bonds
35%
Interest rate swaps in DKK
10%
Interest rate swaps in EUR
40%
 The hedge portfolio has effectively protected
ATP’s reserves and thus the ability to live up to
the guarantees
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Investment activities
 Total return portfolio
 Return target (after tax and funding): Inflation + 1%
 Portfolio is divided into 5 risk classes
 Risk (not capital) is allocated between the risk classes
 Not one dominating asset class
 Portfolio is expected to do well in all economic
environments
 Insurance strategies protect against big draw downs
 85 pct. of assets are managed in-house
 Investments that can be done better and cheaper internally
are managed internally
 ATP seeks leverage to people, skills and processes
 The investment portfolio has delivered high
consistent returns
 Sharpe Ratio (2007-2013) = 1
 19 quarters in a row with positive returns
6
ATP’s investment approach path
- 2005
Mainstream benchmark-driven
60/40 approach
Macro-driven TAA management +
active “idiosyncratic” benchmark
management
2006 - 2012
Risk balanced investment approach
+
separate multi-strategy alpha unit
Smart Beta implementation
2013 -
The “Next Level” portfolio construction approach
Cross-asset risk premia implementation
The 3 leading stars for ATP’s investment philosophy
Clarity
and
consistency
Robustness
Adaptability
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Challenges ahead
 Thanks to extremely accommodative monetary policy in dimensions never seen before
all assets have performed in resent years
 Expected future returns are very low
 Risk of “correlation break-down”
 Most investment approaches are challenged
 Not least Risk Parity portfolios
 How to navigate in such an environment?
8
Not one portfolio is perfect at all times
Percent
9
Recent adjustments
 Reintegrating Alpha and Beta portfolios
 Enhanced coordination of portfolio decisions
 Increased diversification
 Lower costs
 New liquidity risk management model
 Increased robustness of investment portfolio
 Management of non-market risks
10
Until 2012 Alpha was a separate unit
 Until 2012 the investment portfolio was divided into a
“Beta”-portfolio and an “Alpha”-portfolio
 Beta was the market exposure whereas Alpha was the
excess return engine
ATP
Investment
portfolio
Beta
Hedge portfolio
Alpha
 The Alpha portfolio was a success…




High consistent returns
No draw-downs
High Sharpe Ratio
Zero correlation to the Beta portfolio
Alpha was believed to
make up a large part
of the performance in
excess of the market
returns
 …but the absolute returns were low compared to ATP’s
total portfolio
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One investment portfolio
“2005 thinking”
“2013 thinking”
α
βy
α
βx
β
ATP
Investment Portfolio
α
β
βz
ATP
Hedge Portfolio
Investment Portfolio
Hedge Portfolio
β
α
organisation
β
organisation
α
platform
β
platform
α
portfolio
β
portfolio
α
Investment
organisation
platform
β
platform
Investment
portfolio
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“2013 – thinking” of Alpha and Beta
Investment Portfolio
Most important
systematic risk factors
Rates
Credit
Equity
Inflation
Commodities
(20%)
(10%)
(35%)
(25%)
(10%)
Interest rate
strategy
Credit
strategy
Equity
strategy
Inflation
strategy
Commodity
strategy
Other important
systematic risk
factors
Liquidity
Volatility
2005
α
β
2013
α
β
β β
Momentum
Value
Level
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Portfolio construction
The Risk
Utilisation
Rule Book
The Efficient
Use of
Available Risk
Budget
Decision
The Portfolio
Risk
Diversification
Test
The Efficient
Portfolio
Construction
Decision
The Portfolio
Convexity
Test
The Portfolio
Liquidity
Test
Financial
Market Stress
and Valuation
Models
The Use of
Leverage
Rule Book
The Efficient
Use of
Financial
Leverage
Decision
Stress Test
Modelling
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Liquidity risk management model
Liquidity available
Asset
2
Asset
1
Asset
XX
Calculate ATP’s ability to sell assets
(post collateral) over different time
horizons and different financial
scenarios
ATP’s liquidity profile
Liquidity needs
Liquidity needs:
Stresstesting
Collateral
FX & Repo roll’s
Commitments
Central Clearing of derivatives
ATP’s liquidity needs
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What does it take to navigating in a low-yield environment?
 Robustness
 The world is prone to shocks and black swans
 Always try to improve diversification
 Protect against catastrophic events and changes in correlations
 Clarity & Consistency
 Understand what you do and why you do it
 Streamline contractual set-up (ISDA, CSA etc.)
 Adaptability
 No investment strategy will work at all times
 Make sure you have the right liquidity profile
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