The Portfolio Construction

Abstract

Portfolio construction overhauled to strengthen ATP's investments and risk management Over the past decade, ATP's investment strategy has been ba-sed on risk allocation where the focus is on the risk associated with a given investment rather than on the amount invested. The advantage of focusing on risk rather than on the amount invested is that risk diversification and risk management are improved. The risk of investing an identical amount in two dif-ferent assets may be completely different. For example, inve-sting DKK 100 in equities is typically more risky than investing DKK 100 in government bonds. At the moment, the financial markets are characterised by hi-storically low interest rates, decreasing market liquidity and recurring spikes of volatility. This means that investors must be prepared for lower returns and less predictable covariation between different types of investment in the future. To address these challenges, in 2015 ATP completed a major overhaul of its portfolio construction to strengthen its investments and risk management. The aim was to gain a better understanding of the underlying investment risks which in turn strengthens the ability to maximize the risk-adjusted returns. In this context, alternative investments such as private equity, infrastructure etc. represent a particular challenge as the risk profile of such investments is less transparent than that of more traditional in-vestments such as bonds and listed equities. ATP's new approach still focuses on asset risk, but changes the way risk is measured. Rather than allocating each inve-stment into one of five risk classes, ATP will now decompose each investment into four risk factors.