Tags: denmark | pension fund | federal reserve | ATP

Fed Exit Risks Triggering Slump Across Markets, Denmark's Biggest Pension Fund ATP CEO Says

Friday, 31 October 2014 07:54 AM

The head of Denmark’s biggest pension fund says his main concern now is how to ride out what may turn into a simultaneous slump across asset classes as central bank liquidity is withdrawn.

“My concern is how the underlying assets perform,” Carsten Stendevad, who oversees $113 billion as chief executive officer of ATP, said in a phone interview. “The historical risk diversification has to some extent been suspended because central bank liquidity has inflated asset prices. That made all assets rise simultaneously. Now, they may all deflate simultaneously.”

The U.S. Federal Reserve confirmed this week it will end its asset-purchase program amid signs the economy is strengthening. The news sent U.S. stocks and bonds lower while gold prices headed for the biggest drop in three weeks. The main challenge for investors is working out how to hedge against losses as traditional risk models provide little help in navigating the Fed’s exit, Stendevad said.

“We need to be very cautious employing historical risk analyses as they may not apply under current circumstances,” he said. “Usually buying oil is a hedge against geopolitical risks.” This year that “insurance policy failed. We’ve lost money on that.”


The Fed said signs of improvement in the labor market mean it can end an asset-purchase program that has added $1.66 trillion to its balance sheet. The policy shift won’t be possible without causing turmoil in financial markets, according to former Fed Chairman Alan Greenspan.

“My concern isn’t the actual loss but whether diversification patterns will hold up in the years to come,” Stendevad said.

While the Fed withdraws its stimulus, other central banks are delivering more. The yen plunged to a six-year low and gold prices fell after the Bank of Japan unexpectedly increased its target for monetary stimulus.

The BOJ said it will increase holdings of government bonds by 80 trillion yen ($723 billion) and boost exchange-traded fund purchases to 3 trillion yen.

In Frankfurt, the European Central Bank is embarking on asset purchases to revive the economy of the euro area after cutting its main rate to a record low 0.05 percent in September.

Stendevad advises portfolio managers to measure the risk they hold on their books against a scenario that is “worse than the current one. For us, that means we’re not full risk-on,” he said. “Number 2: you need to search thoroughly for assets you believe will perform regardless of the market development.”

At ATP, that means the fund has “cut back on risk compared to what we’re able to do,” Stendevad said. “We’ve kept some powder dry.”

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The head of Denmark's biggest pension fund says his main concern now is how to ride out what may turn into a simultaneous slump across asset classes as central bank liquidity is withdrawn.
denmark, pension fund, federal reserve, ATP
Friday, 31 October 2014 07:54 AM
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