Danish pension fund ATP cuts back on high-yield debt

ATP Group, Hilleroed, Denmark, is scaling back the 789 Danish kroner ($137 billion) pension fund’s investments in high-yield debt securities, as it predicts a rally in corporate and emerging markets 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, said in an interview. “You’re approaching levels where you could start to be careful.”

At ATP, high-yield debt securities, known as credit, returned 3.4 billion kroner, or 7.6%, in the nine months through September. That made it the best-performing asset class in the beta portion of the pension fund’s investment portfolio, ATP said Thursday. 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,” Mr. Jepsen said. “Returns fall sharply.”

While there’s no bubble in high-yield 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,” Mr. Jepsen said.

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

“I don’t think monetary policy can do it by itself,” Mr. 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 pension fund last year lowered its overall risk levels, and “so far we haven’t taken on more risk,” Mr. 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.”