Enhanced risk parity and factor investing: ATP’s surplus investment strategy based on risk allocation to investment factors

Mads Gosvig and Morten Tolver Kronborg

ATP, formed by government law in 1964, is a supplementary labour market pension scheme in Denmark. It is a contribution-based defined benefit pension scheme with collective profit sharing.¹¹ For a detailed introduction, see Jarner and Preisel (2016). Together with the pay-as-you-go funded state pension plan, it is the first pillar of the pension system in Denmark. Portfolio construction based on risk allocation principles and diversification forms the core of ATP’s investment management. The fundamental belief is that a properly diversified portfolio levered to an acceptable level of risk is the best path to deliver the required expected return over time.

This chapter outlines our portfolio construction considerations and factor investment framework: the top-down spanning of the investment universe on a set of investable risk factors leading to the formation of a balanced factor reference portfolio, called “Balanced Beta+”, based on quantitative analyses and qualitative judgement. This framework helps us to obtain clarity, simplification and measurability of the investment process.

For an asset owner, the strategic asset allocation decision is a major return driver (see, for