A multibillion investing giant's take on fear and the Fed

COPENHAGEN •There's a certain familiarity to the regular shrieks of panic. ATP, Denmark's biggest pension fund with about US$120 billion (S$162 billion) in assets under management, says it is listening to the noises, but sticking with a strategy that has made it money over the years.

In an interview in Copenhagen, the chief investment officer at ATP, Mr Kasper Ahrndt Lorenzen, laid out his thinking on everything - from the risk of a sudden asset-price correction and low volatility, to geopolitical risk, the Federal Reserve and relying more on robots to do investments.

"A lot of people are crying wolf," he said. "But you can boil our view down to one basic tenet - don't fight the Fed."

ATP has spent the past half a decade fireproofing its fund, with everything from a new discount curve to a shift over to a factor-based model that looks at risk categories instead of asset classes. In the three months through September, the fund had its highest quarterly return in five years, delivering 8.9 per cent on its investment portfolio.

Mr Lorenzen says market participants crying wolf two years ago didn't scare ATP then, and they don't frighten the fund now. He also views Mr Jerome Powell as a "good choice" to replace Dr Janet Yellen as Fed chair. "He represents continuity. So that landed well."

"We still think the central banks have things under control," he said. "We believe in low-for-longer, and when rates do start to rise, they'll do so at a pace that allows a balanced portfolio to take that in its stride.

"We are quite sceptical when we hear the cries that this time the wolf's really coming. That doesn't mean we don't respect the things we hear regarding valuations, and that we're not constantly asking ourselves whether our risk levels are appropriate. But it can also be a risk not to take on risk, just as it's a risk to take on too much risk."

Mr Lorenzen says political risks, including Brexit, worry him less than the spectre of a sudden spike in inflation. Brexit is "obviously a huge deal for the City of London, but it means less for our portfolio".

And when ATP conducts so-called fire drills, it tests for inflation scenarios. The main worry is that central banks get pushed into a situation where they can no longer be "patient in their approach to withdrawing liquidity. If they're suddenly in a situation in which they can't be as patient, then we have a problem".

These days, ATP's inflation hedges are costing the fund less, thanks to low volatility.

"I can understand that short-term volatility is low. But I don't understand why volatility further down the curve isn't higher," Mr Lorenzen said. "We've had a pretty big inflation hedge for a very long time. That's obviously costly, when there's no inflation. But it hasn't cost us anything over the past few years. Because we've got very long hedges, and they're pretty cheap."

Meanwhile, the question of leaving more of ATP's investing decisions to robots is "worth asking", Mr Lorenzen said.

"We do very active investing in many areas. But then there's the passive side of things, a digitised world, robots," he said. "It's perfectly conceivable that this will play a much bigger role in investing."


A version of this article appeared in the print edition of The Sunday Times on December 10, 2017, with the headline 'A multibillion investing giant's take on fear and the Fed'. Print Edition | Subscribe