Transcript Heritage and Stabilisation Fund Update

Trinidad and Tobago’s Heritage
and Stabilisation Fund (HSF)
Ewart Williams
Former Governor
Central Bank of Trinidad and Tobago
February 2013
1
Outline

Background

Strategic Asset Allocation

Financial Operations

Fund Performance

Peer Perspective

Conclusion
2
Background
3
Background
1.
As mentioned earlier, the Trinidad and Tobago
economy benefitted tremendously from two oil
booms during the 1970’s, but government spending
went unchecked. The non-energy fiscal deficit
climbed from less than 10 per cent of non-energy
GDP to over 40 per cent in the early 1980’s.
2.
The collapse of oil prices in the 1980’s met the
country unprepared for fiscal adjustment, for
which the economy suffered for almost a decade.
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Chart I. Crude Oil and Natural Gas Prices
Natural Gas (Henry Hub)
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Source: Bloomberg.
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The Fund
3. As oil prices began to recover in the late
1990’s, the Government introduced an
Interim Revenue Stabilisation Fund (IRSF) in
2000.
4. The Fund was formalized in March 2007
with the passage by Parliament of the
Heritage and Stabilisation Fund (HSF) Act.
6
Rationale of the Fund
5. The HSF is both a stabilisation and a savings
fund. The rationale behind this dual purpose Fund
is to:-
 Insulate fiscal policy and the economy
from adverse swings in international oil
and gas prices (the stabilisation objective).
 Accumulate savings from the country’s
exhaustible assets of oil and gas for future
generations (the heritage element).
7
Rationale (cont’d)
6. There are two arguments underpinning the
heritage objective.
- Firstly, there is the ethical argument that natural
resources are exhaustible sovereign assets, the
benefits of which should be spread over successive
generations.
- The second argument is that savings funds
transform natural resources into a diversified
portfolio of financial assets. Thus, a well managed
savings fund can reduce the volatility inherent in an
oil and gas economy.
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Rationale (cont’d)
7. The idea is to build up a large savings fund
and to manage it actively such that the Fund
and the investment income would be available
to finance government expenditure when
oil/gas prices experience major slumps or
when oil and gas reserves are depleted.
9
HSF: Governance Structure
8. An underlying tenet of Sovereign Wealth
Funds is that since they represent the
patrimony of the people, that is entrusted
to the government to manage, they must be
subject to the highest standards of:
i.
ii.
iii.
iv.
Transparency
Accountability
Good Governance
Reporting and Disclosures
10
Governance (cont’d)
9. Consistent with these principles the HSF
Act provides for, inter alia, the following:
 a savings Rule;
 a withdrawal Rule;
 a clearly defined governance and disclosure
or reporting regime.
11
Main Provisions of the HSF Act
10. Savings Rule:
 60 per cent of excess energy
revenues (actual minus budgeted
revenues) shall be credited to the Fund.
12
Main Provisions of the HSF Act
11. Withdrawal Rule:
 Draw-downs are permitted if actual energy
revenues
in a given fiscal year are at least 10
percent below budgeted revenues.
 Withdrawals could be up to 60 per cent of the
shortfall, but not exceeding 25 per cent of the
Fund.
 There is a capital floor (of US$1 billion) for the
Fund, beyond which draw-downs are not permitted.
13
Other Provisions of the HSF Act
12. Other provisions of the Act include:
I.
The Fund cannot be used to directly finance
capital expenditure or as collateral for
government borrowing.
II.
The Fund should be invested in assets not
directly related to oil and gas.
III.
The Fund is to be invested with a mediumlong-term horizon.
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Governance Structure
13. The Fund has a clearly defined governance structure (Chart 2) as
follows:
 Parliament approves the legislation.
 There is the Board of Directors, appointed by instrument from the
President of the Republic ,whose job is to decide on the:
a) Investment objectives
b) The Strategic Asset Allocation (SAA)
 The Central Bank is appointed as Fund Manager, but outsources the
function to external fund managers.
 There is quarterly reporting by the Board to the Minister of
Finance, who in turn provides an annual report to the Parliament.
 There is an annual audit of the Fund done by the Auditor General’s
Office.
15
Chart 2. HSF Governance Structure
The
Parliament
Minister of
Finance
The HSF
Board
Central Bank
Custodian
SubInvestment
Manager
External
Auditor
SubInvestment
Manager
SubInvestment
Manager
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Strategic Asset Allocation
17
Strategic Asset Allocation (SAA)
14. Consistent with the Government’s return
objective, risk tolerance and investment constraints.
the HSF Board with technical assistance from the
World Bank agreed on a SAA that called for 25 per
cent of the portfolio to be invested in fixed income
securities with a maturity of 1-5 years, 40 per cent
in longer-term fixed income securities and 35 per
cent in equities, equally divided between US and
non-US equities.
18
SAA Risk and Return Trade-off
15. The SAA embodies universally accepted
principles, for example, the higher the expected
return the greater the risk.
16. Thus, while equity investments have proven to
yield higher returns over the long term, these
investments also carry a higher degree of volatility.
17. In these circumstances, the goal of the SAA is to
meet a long term real rate of return (of about 2
per cent) while recognising that there will be short
term fluctuations in the market.
19
Table 1. Approved Strategic Asset Allocation
Asset Allocation
(Per Cent)
Benchmarks
US Short Duration
Fixed Income
25.0
Bank of America Merrill
Lynch 1-5 Year Treasury
Index
US Core Fixed Income
40.0
Barclay US Bond Aggregate
Index
US Core Domestic
Equities
17.5
Russell 3000 Index ex
Energy
Non-US Equities
17.5
MSCI EAFE Index ex
Energy
Allocation Total
100.0
Asset Class
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Financial Operations: 2007-2011
21
Fund Size
 The Fund was established with an initial balance of
US$1,402.2 million on March 15, 2007 – a transfer from the
IRSF.
 As at August 31, 2011 the Net Asset Value of the Fund was
US$3,882.7 million.
 Total contributions to the Fund since March 2007 amounted
to US$2,133.11 million.
 Interest on the Fund amounted to US$570 million.
 No withdrawal requests were made.
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Fund Performance
23
Market Performance
23. The five-year period of operation of the HSF, spanning March 2007
to present, saw unique conditions characterized by:-
 The international financial crisis followed by a global
recession.
 Very low interest rates in developed markets.
 Dislocation of credit markets.
 Unprecedented intervention by governments and
Central Banks.
 Extreme volatility in financial markets.
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Chart 4. Returns on Selected Market Indices
60.0
Per Cent
40.0
20.0
0.0
2007
2008
2009
2010
Year to Aug-11
Year to
Aug-11
-3.08
-8.12
6.98
1.94
Aug-11
-20.0
-40.0
-60.0
S&P 500
MSCI EAFE
US Treasuries
US High Yield Debt
2007
2008
2009
2010
3.53
8.62
9.01
1.87
-38.49
-45.09
13.74
-26.16
23.45
27.74
-3.57
58.21
12.78
4.9
5.87
15.12
Aug-11
-5.68
-9.30
2.78
-4.00
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HSF Annual Rate of Return
For the Period March 2007 to July 31, 2011
The Fund has averaged an annual return
of 5.27 per cent. This compares to a
benchmark return 5.24 per cent per
annum.
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Table 5. Review of Annual Fund Performance
Period
Portfolio Return
(Per Cent)
Excess Return
Over Benchmark
(Per Cent)
FY2007*
2.97
0.02
FY2008
3.62
0.13
FY2009
2.80
-0.38
FY2010
6.07
0.32
FY2011**
5.79
0.05
* Returns for the period March 15, 2007 to September 30, 2007.
** Returns for the period October 01, 2010 to July 31, 2011.
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HSF Experience
The Fund performed relatively well despite a low
interest rate environment and volatile international
financial markets.
In the earlier years, much of the Fund was invested
in fixed deposits with highly rated commercial
banks and US treasury bills. While this meant
relatively low returns, it avoided major losses
during the financial crisis of 2008/2009.
In 2009, the Fund began investing in equities which
since have been the main driver of returns up to
July 2011. In fact, the accumulated return on the
equity portfolio is approximately 28.91 per cent
from 2009.
28
Table 6. Cumulative Return (from March 2007)
/Per cent/
Asset Class
Return
Money Market
7.74
US Short Duration Fixed Income
7.35
US Core Fixed Income
14.00
US Domestic Equity
32.62
Non US Core International Equity
25.20
29
Table 7. Annualised Returns (from March 2007)
/Per Cent/
Portfolio
Portfolio Return
Benchmark
Return
Money Market
2.04
2.05
US Short Duration Fixed Income
3.70
3.65
US Core Fixed Income
7.02
7.03
US Domestic Equity
16.43
17.44
Non US Core International Equity
12.69
11.19
30
Chart 5. Portfolio Contribution to Total Return
/Per Cent/
31
Table 8. Asset Class Contribution to Total Return
For the Period October 2010 to July 2011
/Per Cent/
Portfolio
Return
Benchmark
Return
Excess
Return
Composite Portfolio
5.79
5.74
0.05
Money Market
0.01
0.00
0.00
US Core Fixed Income
1.20
1.28
-0.08
US Core Domestic Equity
2.23
2.28
-0.05
Non US Core International Equity
1.86
1.64
0.22
US Short Duration Fixed Income
0.39
0.42
-0.04
Performance per Mandate
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Peer Perspective
33
T&T's HSF
Norway Government
Pension Fund
New Zealand
Superannuation Fund
Korean Investment
Corporation
Australia
Government Future
Fund
Alberta's Heritage
Fund
Alaska Permanent
Fund
US$ Billion
Chart 6.Value of Selected Funds (June 2011)
600
400
200
0
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Table 9. Performance of Selected Funds by Objectives:
Pension Reserve Fund
/Per Cent/
Fund
FY 2011
5-YR Return
(Annualised)
Australia
Government
Future Fund
12.4 (Jun 11)
5.2
Norway
Government
Pension Fund
9.62 (Dec 10)
3.8
New Zealand
Superannuation
Fund
26.34 (Jun 11)
4.7
Lowest FY
Return
(last 5 yrs)
Strategic Asset
Allocation
Bonds (15%), Equity (40%), Alt.
Assets (15%), Cash (5%),
-4.2 (Jun 09)
Other (25%)
-23.3 (Dec 08)
Bonds (40%), Equity (60%),
-22.14 (Jun 09)
Bonds/MMKT (20%), Equity
(75%), Real Estate (5%)
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Table 10. Performance of Selected Funds by Objectives:
Stabilisation/Savings
/Per Cent/
5-YR
Return
Fund
FY 2011
Alaska Permanent Fund 20.6 (Jun 11)
Alberta's Heritage Fund 10.4 (Mar 11)
(Annualised) (last 5 yrs)
Strategic Asset
Allocation
Bonds (21%), Equity
(59%),Alt. Assets (18%),
Cash (2%)
4.5
-18.0 (Jun 09)
3.5
-18.1 (Mar
09)
Bonds (20%), Equity (50%),
Alt. Assets (30%)
-13.7 (Dec
08)
Bonds (49%), Equity (44%),
Alt.Assets (6%), Cash (1%)
Korean Investment
Corporation
8.46 (Dec 10)
4.2
Trinidad an Tobago’s
HSF
6.07 (Jun 10)
5.4*
* Returns for 4.25 years.
Lowest FY
Return
2.8 (Sep 09)
Bonds (65%), Equity (35%)
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Conclusion
The HSF grew from US$1.4 billion to $3.9 billion
over the last 4.5 years.
Investment in Fixed Income securities and Equities
have benefitted the portfolio’s performance in the
more recent years.
While the Fund’s performance has been creditable
in both absolute and relative terms, it is important
to review both the legislation and the operation of
the Fund to determine whether amendments are
required to meet the changing environment.
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Appendices
38
Appendix I:
Strategic Asset Allocation
39
Investment Universe available to HSF
and Characteristics
ASSET CLASS
CHARACTERISTICS
Money market and Cash
equivalent
Short term, low return , low capital risks
Bonds
Higher risk and return than Money market investments but lower
than Equity
Equity
Long term, high return and high volatility
Commodities
Inflation hedge, high risk, high return
Real Estate
Inflation hedge, high risk, high return
Private Equity
Illiquid, higher risk than public equity, high return
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Appendix I:
External Manager Selection Process
41
Selection Process for Managers
PSN database (>500 firms considered)
RFIs sent to
219 firms – Feb’08
179 firms responded
RFPs sent to
24 firms – Apr’08
20 firms responded to RFPs
Shortlisted 17 firms
Due diligence visits to
short listed firms – Aug’08
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Selected External Asset Managers
Investment Mandate
Number of Managers Selected
US Short Duration Fixed Income
2
US Core Fixed Income
2
US Core Domestic Equity
2
Non-US Core International Equity
2
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End of Presentation
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