Market risks consist generally seen of risks related to interest rates, credit, inflation, currency and liquidity. P+ attempts to minimise the total investment risk by diversification.
Risk related to shares is the risk of losing money if the value of P+’s shares falls. This is P+’s biggest risk in the sense that it is shares that are the riskiest assets. P+’s total share portfolio is well diversified, but if the overall share market drops, the pension fund will lose money.
Risk related to interest rates is the risk of losing money in case of changes in the interest rate level. P+’s secure bonds in the form of government bonds on the asset side normally lose value when the interest rates increase, and the other way around, they increase in value when the interest rates fall. The value of P+’s pension provisions also increase when the interest rates fall and the other way around, it falls when the interest rates increase. But as they are 'outstanding funds', they constitute an opposite effect on the interest rate risk from the asset side.
Risk related to credit is the risk of losing money if the market lose confidence in creditor's ability to meet the his debt and consequently requires an increased risk premium. Previously, this risk only applied to emerging markets bonds and corporate bonds, but within the past years also a number of western countries’ government bonds have been included.
Risk related to inflation is the risk of losing money on real assets like index-linked bonds, real estate and forest in case of deflation.
Risk related to concentration is the risk of losing money due to a large dependence on few assets.
Risk related to currency is the risk of losing money when the currency rates fluctuates. In order to reduce the pension fund’s currency exposure, P+ uses forward exchange contracts for the strongest currencies. This is among other things done to comply with the Danish Financial Business Act which stipulates the size of P+’s currency exposures.
Risk related to liquidity is the risk of losing money if P+ has to raise liquidity or is not able to meet its commitments. To control P+’s liquidity risk, all investments are marked with a liquidity score which reflects the horizon for liquidating the investment.