Alberta’s Heritage Savings Trust Fund performed poorly last year

For the third time since the fund was created in 1976, Alberta’s Heritage Savings Trust Fund lost investment income in 2022-23, and its $2.5-billion growth from the previous year was due to government action, not an increase in market value.

That was the message Steve Thompson, executive director of capital markets with Treasury Board and Finance, delivered to the Standing Committee on the Heritage Savings Trust Fund on Monday. The committee was briefed on the fund’s annual report and the first quarter report for 2023-24 — which offered a much rosier picture.

The fund posted a $2.5-billion return in 2022-23, bringing its total value to $21.2 billion.

Treasury board officials credited legislative amendments that allowed the fund to keep its $1.25-billion investment income from 2021-22, which would previously have been transferred to general revenues. Those same legislative amendments allowed the government to take part of the surplus, $753 million, and deposit it in the fund.

The Heritage Savings Trust is a long-term investment vehicle for the province, designed to stash away oil and gas royalties during boom years for future prosperity. However, provincial governments have not always made adding cash to the trust a priority.

The UCP is aiming to rectify that by mandating that a percentage of any surplus is invested, with additional flexibility for the government to top it up further. It also removed a rule that required previous governments to move any surplus beyond inflation-proofing to general revenue.

The fund’s net investment earnings were $1.9 billion lower than expected in Budget 2022, which Thompson attributed to global financial market performance in the first half of the year.

“After inflation-proofing there was no investment income available to be transferred to the general area of the fund during the fiscal year,” he told the committee. “Again, this has not occurred since the global financial crisis of 2008.”

The fund’s five-year target is to match the Canadian consumer price index, plus 450 basis points. As inflation rises, so too does the target.

Over the past 10 years, the fund has earned 8.4 per cent returns.

While rising inflation does increase the targeted returns, the fund benefited from inflation-sensitive and alternative asset classes such as infrastructure, real estate and renewable resources, which gave 8.4 per cent in returns over the course of the 2022-23 fiscal year. Meanwhile, the fund’s fixed income investments returned nothing and its equity investments saw a bump of 0.2 per cent.

Jean David Tremblay-Frenette, chief economist at the Alberta Investment Management Corporation (AIMCo), said while inflation is easing on goods, it persists on services.

He said labour markets in Canada, the U.S., U.K. and Europe are looser and he expects inflation on services will eventually decrease as pressure to increase wages lessens. Inflation is not expected to drop to the Bank of Canada’s target of two per cent until 2025.

The committee also discussed the fund’s first-quarter report, which saw significantly higher investment income due to improvements in the global financial markets.

As of June, the fund produced $778 million in investment income, minus $39 million in investment expenses.

AIMCo’s chief fiduciary management officer Amit Prakash told the committee the fund was up two per cent, above its benchmark of 1.7 per cent in the quarter.

“While it seems like a distant memory right now, the beginning of the period did have its fair share of shocks into the system,” he recalled. “There was a regional banking crisis in the U.S. that was front and centre. We had the recurring public U.S. debt ceiling impasse … and in the midst of this, fortunately, the market looked through the noise.”

The committee scheduled its public meeting to discuss the fund for November 30 from 6 p.m. to 8 p.m.