Danish pension fund ATP plans to start investing in U.S. mortgage-backed securities before the end of the year and could gradually build a position of more than €1 billion in the coming years.
Henrik Gade Jepsen, chief fund manager for the pension fund's €28 billion in fixed income from Copenhagen, said ATP has about €5.4 billion in U.S. and Canadian government and agency bonds and could shift a meaningful portion out of current positions and into mortgage-backeds to finance the move. "Our aim is to diversify our investment in North America, rather than increase our overall allocation to the region," said Jepsen. He declined to be more specific about his tactics.
Jepsen still sees value in the Danish covered bond market and is loath to create an asset-liability mismatch by increasing exposure to interest rates outside the Eurozone. Almost 25% of ATP's government portfolio is in Danish govvies and close to 60% of its covered bond investments are in Danish mortgage-backeds. Jepsen plans to stick to Danish and U.S. mortgage-backeds for the time being, noting that they both offer a 45-50 basis point pick-up over govvies, whereas German Pfandbriefe holdings offer only a 10 basis point pick up.
ATP may further reduce the slightly less than six year duration of its foreign government bond portfolios to bring it more in line with the market's five-year duration. But Jespen stressed ATP's board has not yet decided to do so. "It is an on-going process and we've already reduced duration by two years since 2002," Jepsen pointed out, recalling how ATP's duration shot up to eight years in an initial response to regulatory changes requiring fair market valuation of pension liabilities. ATP now largely uses swaps rather than long-dated bonds to accomplish matching, which frees up the manager to look for alpha in shorter-dated bonds across the credit curve.
ATP is approximately 54% invested in European, U.K. and U.S. government bonds, with a further 43% in European covered bonds and U.S. agencies. The slightly less than €1 billion that has been invested in high-yield and emerging market bonds over the past three years is outsourced and ATP has as yet no money in investment-grade bonds. Jepsen emphasized the fund has no plans to invest in this asset class until valuations become more reasonable.
