“The short term always wins, especially in a democracy,” says Lars Rohde, AMP ’95.
Just back from summer holiday, the Governor of Denmark’s Central Bank is reflecting on the key challenge of monetary policy: creating market stability with limited tools in a complex environment. The INSEAD Advanced Management Programme graduate sounds both cheerful and serious as he considers the political realities that impact his job. These are, after all, policy decisions outside the control of a central banker whose current mandate is to peg the Danish krone—the currency on which Rohde’s signature appears—to the euro.
Short-term calculations often drive political choices, including ones that contribute to financial bubbles, such as the one in 2008, he says. “There were a lot of reasons that we had this crisis, including a huge debt build-up and too much easy credit,” Rohde points out. The short-term ‘cure’ was providing more credit—more easing of monetary policy. The tactic, popular with many voters, has helped buoy the overall economy for now, but with potentially dire longer-term consequences—ones that he believes demand very careful watch today.
“The dark side of this easing is that you always create even more debt in the private sector and especially for governments,” Rohde says. “Then you have an even longer period of very low, almost zero interest rates. The more you keep rates low, the greater the risk of creating an additional bubble by ‘kicking the can down the road’ instead of getting the problems solved.”
Yet, successful companies and countries are able to take the long-term into consideration, says Rohde, who has devoted the last 25 years to managing investment and the risks that accompany it. “Singapore, South Korea, Germany and to some extent my own country are among the examples of nations striking a balance.”
Rohde is an economist whose diverse achievements and extensive board service have earned him a spot among the world’s best financial thought leaders. CIO magazine, for instance, named him No. 19 in its “Power 100” survey. The publication praised Rohde for his “mold-breaking” strategies during his long tenure as CEO of ATP, Denmark’s mandatory supplementary pension plan. As head of ATP from 1998 until 2013, he oversaw the management of some €62 billion in assets, garnering numerous prestigious international awards for ATP in the process.
“It was a great responsibility to head ATP during a time of challenging opportunities,” recalls Rohde, 60, who was appointed Chairman of the Board of Governor for Danmarks Nationalbank in 2013. “We survived the dotcom bubble and the 2008 financial crisis. That was very exciting in many ways. I had the chance to work with many very talented people and we developed a unique business model.”
That model—a breakthrough, really—took a fresh approach to risk management, one that today has been embraced as risk parity combined with liability driven investments. This model, Rohde explains, blends investment and hedging portfolios to aim for high returns while maintaining solvency. Pension liabilities were also marked to market in a way that safeguarded against volatility. “We had a well-diversified portfolio and were always talking about risk allocation,” Rohde says. “On the one hand, our approach let us protect the funding of the institution; on the other hand, we were trying to earn revenue with another portion of our portfolio, managing the risks almost like a hedge fund.”
A lot of global pensions were caught out when interest rates plummeted, he says. “When the huge part of your assets went down 30 or 40%, if you were not prepared for that situation, you could go bankrupt—and many others did. At ATP, we had this ‘options life’ way of thinking. We always tried to protect against the downside and keep the upside open.”
The fund earned more than 10% per year over the last decade, thanks to the scrutiny of an in-house research team. And a little bit of luck, Rohde admits.
“At INSEAD, we had a teacher who told us we should be hard-working, intelligent and lucky,” Rohde says. “In 2008, we were lucky since we began the year with a huge investment in oil futures, sold out in the middle of the year and ended the year with a reduced exposure.” The timing was perfect, since the price of oil rose from $100 a barrel to almost $150, but then fell to $50 as 2008 closed.
But Denmark’s recent economic reputation is well regarded for reasons beyond mere luck. The nation’s “flexicurity” policy model aims both to provide labour safeguards while pursuing dynamic market policies, a combination that encourages entrepreneurship and has earned Denmark one of the few AAA credit ratings. The country’s economy hasn’t always been so robust, says Rohde, a former associate professor of financial planning at Copenhagen Business School. In the 1980s, it had high unemployment and inflation rates, coupled with high foreign net debt and huge public sector deficits
“Today we have almost exactly the opposite situation,” he says. Why? “Because of strong political institutions that can make the necessary and sometimes unpopular decisions.”
Those decisions, he adds, are usually rooted in earlier policy choices: “Every country has its unique history and a lot of today’s actions are path-dependent. What you do tomorrow depends in part on what you did yesterday. But there is a lot that, as a nation, you can do to keep your destiny in your own hands.”
Rohde’s career journey began somewhat unexpectedly: As an only child of parents who were teachers, Rohde was a voracious reader with a passion for history and archaeology. He developed an interest later in films and then the social sciences, which led to studying econometrics and statistics at the University of Aarhus. He was about 40 when he enrolled in INSEAD’s executive education programme, an experience he credits with enriching his professional toolbox.
At the time, he had been CIO of Realkredit Danmark, a leading Danish mortgage bank. At INSEAD, he discovered “some outstanding insights”—including ones that predicted important globalisation dynamics about labour outsourcing.
“I also learned how fantastic it was to work with people who had totally different experiences than my own,” he says. “I learned that innovation is created when people start asking unusual questions, not the usual ones. It’s not the answer that is important, but the question.”
Find out more about the Advanced Management Programme (AMP).
