Danish Pension fund ATP’s investment portfolio generated an 8.9% return for the third quarter of 2017, its best quarterly performance in the past five years. For the first three quarters of the year, the fund earned DKK24.6 billion ($3.84 billion), which is equivalent to a 24.4% rate of return, the company said.
The strong performance was mainly driven by equity investments. Over the past five years, the fund has reported an average return of 4% per quarter in the investment portfolio, and earned positive returns for 18 out of 20 quarters.
“Our long-term return—over the one-, three- and five-year horizons—remains stable at a high level,” said ATP CEO Christian Hyldahl in a statement. However, Hyldahl added that “a measure of caution is called for. Despite the strong performance, the outlook is for lower returns in the future as central banks tighten liquidity and raise interest rates.”
Listed Danish equities were major performance contributors, generating a return of DKK5.3 billion during the first three quarters, as were private equity and listed international equity investments, which returned DKK4 billion and DKK3.5 billion, respectively, over the same time period.
“While global economic growth seems to be firmly on track, geopolitical uncertainty has increased,” said Hyldahl. “We have leeway to take risks, but we will do so based on an extremely disciplined approach to both portfolio construction and risk management.”
In an attempt to provide stable returns while maintaining independence from cyclical variations, ATP allocates the risk associated with each investment according to four risk factors—equity factor, interest rate factor, inflation factor, and “other” factors—based on the types of risk to which the investment is exposed.
ATP says the factor investing approach informs investment decisions, and allows analysis and comparison of investments without reference to asset type. Over the past three quarters, ATP has adjusted its investment portfolio’s risk allocation, which resulted in a de-emphasis on equities. As of Sept. 30, it lowered its equity factor risk allocation to 44% from 50% of the investment portfolio as of Dec. 31, 2016, while raising its interest rate factor to 33% from 25%. It also increased its inflation factor allocation to 14% from 9% at the end of last year.
The fund also deemed is hedging strategies a success. The value of the guaranteed benefits fell by DKK17.7 billion in Q1-Q3, while ATP’s hedging portfolio generated a negative return after tax of DKK16.4 billion. Overall, hedging activities resulted in a loss of DKK1 billion on pension guarantees with a total value of DKK638 billion.