One of Denmark’s top pension funds lost $567 million, or 3.2% of its investment portfolio, in 2018.
Slips in international stocks and interest rates rising in the US were the main hiccup driver for the ATP fund, which now has assets worth 785 billion in Danish krone (DKK), or $119 billion. Much of that loss occurred in the fourth quarter.
The plan returned 5.8% in the first nine months of 2018, and 15% the year prior.
The fund’s interest rate-linked hedging strategy shielded it from further damage. The tactic adjusted rates to 3% after the discounting curve’s 40-year mark, which resulted in a DKK 3.1 billion loss as the fund moved money from the surplus to guarantee payments. However, this grew the hedging portfolio to DKK 693 billion from DKK 651 billion.
Government and mortgage bonds and illiquid investments—like private equity, real estate, and infrastructure—made positive contributions to performance, but the portfolio had only gained a measly 0.8% with their help.
Mid-year life expectancy adjustments caused the firm to funnel DKK 20 billion out of assets and into its pension surplus.. Danes will now live an average of 81.2 years, which ATP said is increasing faster than expected. The firm had lost DKK 5.5 billion before the global life expectancy update occurred, which contributed to a red DKK 25.5 billion post update.
“After several years of stable, positive returns, the financial markets, especially toward the end of 2018, were marked by negative returns in the global equity markets and rising interest rates in the USA,” said acting chief executive officer Bo Foged, who added that after recent years of healthy performance, “it was to be expected that the high returns could not continue.”
He said ATP’s long-term investment horizon and balanced risk approach provided “a solid foundation” for keeping retirement benefits stable, but expects “moderate” returns in the near future.
The fund’s investment portfolio has allocations across four risk factors: equity (40%), interest rates (34%); inflation risk (19%), and “other” risks (7%).