Bloomberg News

High-Yield Loses Allure for Denmark’s $137 Billion ATP Fund

October 26, 2012

Denmark’s biggest pension fund, ATP Group, is scaling back its investments in high-yielding debt securities, as it predicts a rally in corporate and emerging market bonds may be close to ending.

“If you look at bonds, they’ve performed incredibly well and credit spreads have narrowed considerably,” Henrik Gade Jepsen, chief investment officer at the Hilleroed, Denmark-based fund, said in an interview. “You’re approaching levels where you could start to be careful.”

Demand for corporate debt has soared as investors sought alternatives to government bond yields kept down by central bank stimulus. According to Bank of America Merrill Lynch’s EMU Corporates Non-Financial Index, corporate bond yields dropped 16 basis points, or 0.16 percentage point, this month to 123 basis points more than benchmark German government debt. The spread narrowed to 122 on Oct. 23, the smallest gap since July 2011.

At ATP, high-yielding debt securities, known as credit, returned 3.4 billion kroner, or 7.6 percent, in the nine months through September. That made it the best performing asset class in the beta portion of the fund’s investment portfolio, it said yesterday. Fifteen percent, or 49 billion kroner, of the portfolio is in credit.

“Credit has a tendency to perform very well until suddenly it has a tendency to perform not very well,” Jepsen said. “Returns fall sharply.”

No Bubble

While there’s no bubble in high-yielding debt markets, which include corporate bonds and debt from emerging nations with low ratings, “at some point you get to a level with credit spreads where the upside is limited compared with the downside,” he said.

Tighter credit spreads followed declines in benchmark bonds as investors turned to higher risk classes in search of yield. Denmark pays about 23 basis points less than Germany to borrow over 10 years, and the yield on the Nordic nation’s 3 percent note due November 2021 was at 1.296 percent at 1:58 p.m. local time.

ATP’s high-yielding bond investments returned 12.7 percent in the first nine months, while loans and other credit products returned 4.9 percent, it said. That compares with a return of 10.5 percent for the alpha portfolio and a 3.4 percent return for the entire investment portfolio.

ATP, which has total assets of 790 billion kroner ($137 billion) and was named Europe’s best pension fund last year by Investment and Pensions Europe, isn’t raising its total risk exposure even amid early signs that central bank interventions may be stabilizing the world economy.

“I don’t think monetary policy can do it by itself,” Jepsen said. “We need to see economic growth improving and that’s the risky part both in Europe and the U.S., with the election and the fiscal cliff.”

The fund last year lowered its overall risk levels, and “so far we haven’t taken on more risk,” Jepsen said. Prices “are not at a level where we have started to take on more risk. That applies more or less across the board.”

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net; Christian Wienberg at cwienberg@bloomberg.net


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