The ATP Group Annual Report 2012

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Management's Review Business Model Risk Pension Hedging and investment Hedging Investment Administration Social Responsibility The ATP Group Financial StatementsReturn on the beta portfolio and individual risk classes 2008-2012DKK billion806040200(20)(40)2008 2009 2010 2011 2012Total beta portfolioInterest RatesInflationCreditCommoditiesEquitiesCoordinated management of risk-taking and focusedapproach to investment in individual risk classesOverall investment decisions and risk-taking in the investmentportfolio are based on coordinated management. Thisensures an appropriate allocation of all investments relativeto the overall risk budget and the desired risk diversificationof the investment portfolio at all times. Risk diversificationis achieved by composing the risk allocation betweenand within the five risk classes so as to ensure thatthe portfolio is robust to most economic outcomes. Differentinvestments respond differently to economic changes. Forinstance, equities tend to perform well in a rising growth environment,while safe-haven bonds achieve their best performanceamid declining growth and inflation. By strikingthe right balance in the allocation of investments, it is possibleto build a portfolio that is not dependent on a specificeconomic outcome, and which generates a more stablereturn over time. In this context, it should be noted that thecurrent low interest rates are atypical. The risk-diversificationability of government bonds is highly reduced when interestrates are this low.Within each of the five risk classes, investment managersare responsible for ensuring a focused approach to investmentsin the respective risk classes. The aim is to achievemaximum payoff for the market risk incurred. A number ofstrategies are used and developed, the objective of whichis to systematically reap the payoff for market risk where itis most attractive. For instance, the bond portfolio is reallocatedfrom short-dated bonds to long-dated bonds andvice versa, depending on economic developments. Moreover,the focus is on ensuring that investments are made inthe most expedient and cost-effective manner. Therefore, itis regularly assessed whether a given investment should beachieved by purchasing an asset, through a financial contractor by use of external managers.ATP's investments are hedged against currency fluctuationsin Danish kroner and euros. At year-end 2012, the exposureto Danish kroner and euros was 99.9 per cent.ATP AlphaSince 2006, ATP has been operating ATP Alpha as an independentunit, investing in a large number of financial markets.The objective was to generate stable returns that were independentof long-term movements in financial markets. Duringthe period from 2006 to 2012, ATP Alpha generated a profitof close to DKK 1.7bn.As part of the ongoing optimisation of ATP's activities, ATPdecided to restructure ATP Alpha at the end of 2012. The objectiveis to strengthen ATP's position in a challenging investmentenvironment – with prospects of a prolonged period ofslow economic growth, low returns, significant risks and tightfinancial regulation.Following the restructuring, ATP Alpha will continue as an independentunit, but will be linked more closely with other ATPinvestments. The strong and flexible investment platform developedby ATP Alpha will be used for a larger portion of ATP'sinvestments. This will provide for even better management ofATP's overall investment risk and, as an added benefit, a reductionin expenses.The ATP Group – Annual Report 201244
Management's Review Business Model Risk Pension Hedging and investment Hedging Investment Administration Social Responsibility The ATP Group Financial StatementsPositive returns in Credit, Equities and Interest RatesMarket return on the investment portfolio of DKK 12.1bn.Investment-activity resultsDKK million ATP SUPP Other¹ GroupReturn on investment 12,067 2 156 321 12,544Expenses (247) (9) (342) (598)Tax on pension-savings returns (1,734) (21) 0 (1,755)Investment-activity results 10,086 126 (21) 10,1911) Comprised primarily of reclassifications related to financial statement consolidation.2) The DKK 69m difference relative to 'Total investment portfolio after financing' in the table 'Return on the ATP investment portfolio' is due to differentmethods in terms of currency translation of foreign subsidiary financial statements into Danish kroner, on the one hand, and recognition of brokeragefees, on the other.ATP's investment-activity results as a ratioof the bonus potential, beginning of yearPer centQuarterly return on the investment portfolio during the period 2008-2012 as a ratio of the bonus potential at the beginning of the yearPer cent50403020100(10)(20)(30)(40)2008 2009 2010 2011 20122520151050(5)(10)(15)2008 2009 2010 2011 2012The Group’s investment-activity results totalled DKK 10.2bn,ATP’s investment-activity results accounting for DKK 10.1bn.The bonus potential is ATP’s foundation for assuming investmentrisk. Investment-activity results were equivalent toa return of 13.6 per cent on the bonus potential.The ATP investment portfolioThe objective of the investment portfolio is to generate a returnthat is sufficient to preserve the long-term purchasingpower of pensions. In other words, ATP seeks to achievepositive returns, regardless of financial-market conditions.The return on the investment portfolio in 2012 should beseen in the context that this was another year in the shadowof the financial crisis with low interest rates and uncertainfinancial markets. Throughout the year, ATP’s Supervisoryand Executive Boards opted for a conservative investmentapproach with low utilisation of the risk budget in light of theconsiderable uncertainty in financial markets.In 2012, the investment portfolio generated an overall marketreturn of DKK 12.1bn before tax. The investment portfoliohas been generating positive return contributions everyquarter for the last four years.The investment portfolio consists of a beta portfolio and analpha portfolio.The DKK 270.2bn beta portfolio contributed a return of DKK11.1bn. Three out of five risk classes in the beta portfolioproduced positive returns. The Credit risk class, generatinga return of DKK 4.6bn, was the top performer in DKK terms.The Credit risk class, generating a return of DKK 4.6bn, wasthe top performer in DKK terms. The Equity and InterestRate risk classes also achieved high returns.The ATP Group – Annual Report 201245
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The ATP Group Annual Report 2012

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