![]() |
Alberta
Heritage Savings Trust Fund |
|
Released: November 26, 2003 If you would prefer to download
this file in pdf format, click here. Index
The fair value of the Heritage Fund
increased by $1.2 billion over the past six months, almost entirely
reversing the decline in fair value of $1.3 billion for the previous year.
World stock markets continued their upward trend this quarter, marking two
consecutive quarters in which markets have increased. Low interest rates
and better than expected corporate profits continued to fuel the recovery.
The Canadian stock market increased again this quarter despite the
appreciation in the Canadian dollar which has made exports more expensive
and constrained growth. Growth in the information technology sector led
all ten stock market industry sectors this quarter and over six months.
The US economy continued to accelerate. Increases in the US gross domestic
product (GDP), better than expected manufacturing reports and construction
spending reports indicate a growing manufacturing sector in the US and
strong consumer spending. Japan was a key contributor to the performance
of the non-North American market. The Japanese economy continued to grow,
supported by a stronger yen, rising external investment and a healthier
domestic economy. At September 30, 2003, the fair value of the Heritage Fund stood at $11.9 billion up from $11.7 billion at June 30, 2003 and $11.1 billion at March 31, 2003. Over the past six months, the increase in fair value of $1.2 billion was offset by transfers to the General Revenue Fund of $386 million, resulting in a net increase of $836 million. Overall, the Fund returned 3.7% from its investments this quarter and 11.0% over six months. Fund equity, at cost, remained unchanged at $11.4 billion.
The Fund recorded net income of $187 million this quarter bringing total net income over six months to $386 million. Over six months, the Fund earned $184 million from investments in equity markets, $158 million from investments in bonds, notes and short-term paper, $21 million from real estate investments and $23 million from absolute return strategies. The Fund's forecast net income for the year ended March 31, 2004 is $440 million. On a consolidated basis, the forecast net income is $426 million. The consolidated forecast net income excludes income from holdings of Provincial Corporation debentures. The Heritage Fund accounts for its investments on a cost basis of accounting. Investment income on a cost basis excludes unrealized gains and losses. Investment income on a fair value basis includes unrealized gains and losses. The investment income on a fair value basis for the three months ended September 30, 2003 totals $436 million and $1.2 billion over six months.
Transfers to the General Revenue Fund Net income is transferred to the Province's main operating fund, the General Revenue Fund (GRF), and used for Albertans' priorities like health care, education, roads, tax reductions and debt repayment. Changes in unrealized gains and losses are not included in net income determined by the cost basis of accounting and therefore not transferred to the General Revenue Fund. The Fund's net income for the six months ended September 30, 2003, amounted to $386 million of which $220 million was transferred to the General Revenue Fund and $166 million remains payable to GRF. Actual cash transfers of $220 over six months or $110 million per quarter are based on one quarter of the original budget estimate of income of $440 million for fiscal year 2003-2004. Investments and investment
income are recorded on the financial statements of the Heritage Fund at
cost in accordance with government accounting policies. The fair value of
the Fund and its investments are provided for information purposes.
Management uses fair value to assess the investment performance of the
fund against market-based benchmarks. The investment strategy is to
invest in a diversified portfolio to optimize long-term returns at an
acceptable level of risk. The policy asset allocation is reported in the
Fund's 2003-06 business plan.
The Heritage Fund posted an overall positive rate of
return of 3.7% this quarter, the same as the Fund's benchmark return. Over
six months, fund investments returned 11.0%, 30 basis points better than
the benchmark of 10.7%. The Fund earned positive returns from all asset
classes. The performance of the Heritage Fund investments is measured against various market-based indices. Value added by investment management is accomplished through asset mix decisions and security selection. The following sections describe the performance of the Fund's major asset classes in relation to their benchmarks. The Canadian bond market posted modest returns this quarter. The Scotia Capital (SC) Bond Universe Index measures the performance of marketable Canadian bonds with terms to maturity of more than one year. Over the past quarter, the SC Bond Universe Index increased by 1.3% while the short term SC 91-Day T-Bill Index increased by 0.8%. The Fund's actual rate of
return over the quarter from Canadian bonds was 1.3%, equal to the
benchmark SC Bond Universe Index. The Fund's return from short-term
securities was 0.8% the same as the benchmark SC 91-Day T-Bill Index. Over
four years, returns from long-term and short-term securities exceeded
their benchmarks by 70 and 20 basis points respectively. The
out-performance over four years was primarily due to a higher weight in
corporate bonds and duration management. The Heritage Fund's total fixed
income portfolio is internally managed through various pools and direct
holdings. The Canadian stock market increased this quarter. The information technology sector led the increase among the ten industry sectors followed by the materials and industrials sectors. The Toronto Stock Exchange (S&P/TSX) Composite Index measures the performance of Canada's top companies in ten industrial sectors. The S&P/TSX Index increased by 6.7% for the three months ending September 30, 2003 and 18.0% over six months. The Heritage Fund's Canadian
equity portfolio is held in various investment pools managed by internal
and external managers. Over the quarter, the Fund's actual return from
Canadian equities was 6.7% equal to the benchmark S&P/TSX. Over four
years, the fund's return from Canadian equities was 2.5% or 80 basis
points less than the benchmark S&P/TSX. Over the long term, the
under-performance was due to an over-weight position in growth orientated
equities. The United States equity market recorded modest gains this quarter. Technology stocks led the increase followed by materials and industrials stocks. The Standard & Poor’s 500 Index, S&P 500, which measures the performance of the top 500 American companies, increased by 2.3% during the past three months and 8.9% over six months in Canadian dollars. The Fund’s actual rate of
return over the quarter from US equities was 2.2%, 10 basis points less
than the benchmark S&P 500. Over four years, the Fund’s US equity
portfolio returned a negative 6.1%, 70 basis points better than the
benchmark S&P 500 Index. Over the long term, the out-performance was
due to a weighting towards US small capitalization stocks and positive
currency hedge returns. Non-North American Equity Investments The Non-North American equity market recorded strong gains this quarter. The Morgan Stanley Capital International Index for Europe, Australasia and the Far East, MSCI EAFE Index, measures the performance of approximately 1,000 companies on 21 stock exchanges around the world. The index increased by 7.7% this quarter in Canadian Dollars and 18.5% over the past six months. The Fund’s actual return
over the quarter from Non-North American equities was 7.6%, 10 basis
points less than the benchmark MSCI EAFE Index. Over four years the Fund’s
Non-North American equity portfolio returned a negative 7.0%, 90 basis
points better than the benchmark MSCI EAFE Index. The out-performance over
the longer term was due to superior stock selection for Europe and Pacific
region investments. The Fund’s real estate investments are held in the internally managed Private Real Estate Pool. Nearly half of the real estate portfolio is invested in retail, half in office and a small portion in industrial and residential. Approximately 70% of real estate holdings are located in Ontario, 28% in Alberta and 2% in British Columbia. The Fund’s real estate portfolio earned 0.8% this quarter and 8.1% over 4 years. The real estate portfolio returned 160 basis points below the benchmark over four years due to a relatively larger position in lower performing Ontario and Alberta office properties. However, the market dominant nature of these properties make them highly sought after and lower yielding.
At September 30, 2003, investments in real estate totaled 7.7% or $928 million of the Heritage Fund investment portfolio compared to 7.9% or $870 million at March 31, 2003. Absolute return strategy investments were initiated late in the second quarter of last year. These strategies encompass a wide variety of investments with the objective of realizing positive returns regardless of the overall market direction. A common feature of many of these strategies is buying undervalued securities and selling short overvalued securities. Over the quarter, absolute return strategies generated a return of 1.2%, 50 basis points less than the benchmark Consumer Price Index (CPI) plus 6.0%. Over six months, absolute return strategies returned 4.0%, 110 basis better than the benchmark. The out-performance over six months was due to strong performance of underlying managers. The Absolute Return Strategy Pool uses currency hedges to manage foreign exchange risk. At September 30, 2003, investments in absolute return strategies totaled 2.9% or $364 million of the Heritage Fund investment portfolio compared to 2.6% or $283 million at March 31, 2003. Administrative expenses
include investment management, cash management, custodial and other
expenses. External management and custodial fees are deducted directly
from the income of externally managed investment pools. Internal
administrative expenses are deducted from the internally managed pooled
funds and also directly from the Fund.
Over the past six months,
expenses of direct and internally managed investment pools increased by
$1.014 million over the same period last year. The net increase in expense
was due to additional staffing requirements, system improvements and the
transfer of US passively managed investments from external managers to
internal managers. Business Plan Performance Measures |
Alberta Heritage Savings Trust Fund Financial Statements September 30, 2003 (unaudited)
Statement of Changes in Financial Position Notes to the Financial Statements September 30, 2003 (unaudited) NOTE 1 AUTHORITY AND MISSION The Alberta Heritage Savings Trust Fund
operates under the authority of the Alberta Heritage Savings Trust Fund
Act (the Act), Chapter A-23, Revised Statutes of Alberta 2000, as
amended. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND REPORTING PRACTICES These financial statements are prepared
in accordance with generally accepted accounting principles. (a) Portfolio Investments Investments in loans are recorded at cost less any allowance for credit loss. Where there is no longer reasonable assurance of timely collection of the full amount of principal and interest of a loan, a specific provision for credit loss is made and the carrying amount of the loan is reduced to its estimated realizable amount. Investments are recorded as of the trade date. The cost of disposals is determined on the average cost basis. Where there has been a loss in value of an investment in fixed-income securities, mortgages, equities, real estate and absolute return strategies that is other than a temporary decline, the investment is written down to recognize the loss. The written down value is deemed to be the new cost. (b) Investment Income Gains and losses arising as a result of disposals of investments are included in the determination of investment income. Income and expense from derivative contracts are included in investment income. (c) Foreign Currency (d) Investment Valuation
(e) Valuation of
Derivative Contracts
NOTE 3 PORTFOLIO INVESTMENTS The majority of the Fund’s investments are held in pooled investment funds established and administered by Alberta Revenue. Pooled investment funds have a market based unit value that is used to allocate income to participants and to value purchases and sales of pool units. As at September 30, 2003, the Fund’s percentage ownership, at market, in pooled investment funds is as follows: (a) The Consolidated Cash
Investment Trust Fund is managed with the objective of providing
competitive interest income to depositors while maintaining appropriate
security and liquidity of depositors' capital. The portfolio is
comprised of high-quality short-term and mid-term fixed-income
securities with a maximum term-to-maturity of three years. As at
September 30, 2003, securities held by the Fund have an average
effective market yield of 2.7% per annum (March 31, 2003: 3.23% per
annum).
(g) The Domestic Passive
Equity Pooled Fund is managed on a passive approach with the objective
of providing investment returns comparable to the S&P/TSX Index. A
portion of the portfolio is comprised of both publicly traded Canadian
equities and structured investments replicating the S&P/TSX 100
Index and the S&P/TSX 60 Index. The other portion of the portfolio
fully replicates the S&P/TSX. The Pool's investment in units of the
Floating Rate Note Pool (FRNP) are used as the underlying securities to
support the index swaps of the pool. FRNP is managed with the objective
of generating floating rate income needed for the swap obligations in
respect of structured investments in foreign equities, domestic equities
and domestic bonds. Through the use of interest rate swaps, FRNP
provides investment opportunities in high quality floating-rate
instruments with remaining term-to-maturity of ten years or less. (q) The Absolute Return
Strategy Pool is managed with the objective of providing investment
returns higher than the Consumer Price Index (CPI) plus 6%. The Pool
uses external managers who employ various investment strategies. These
strategies are expected to produce absolute positive investment returns
with lower volatility. NOTE 4 DERIVATIVE CONTRACTS Derivative contracts are financial contracts, the value of which is derived from the value of underlying assets, indices, interest rates or currency rates. The Fund uses derivative contracts held indirectly through pooled investment funds to enhance return, manage exposure to interest rate risk and foreign currency risk and for asset mix management purposes. The notional value of a derivative contract represents the amount to which a rate or price is applied in order to calculate the exchange of cash flows. (i) A swap is a contractual agreement between two counter-parties to exchange a series of cash flows based on a notional amount. An equity or bond index swap involves the exchange of a floating interest rate cash flow for one based on the performance of a market index. For interest rate swaps, parties generally exchange fixed and floating rate interest cash flows based on a notional amount. A credit default swap allows counter-parties to buy and sell protection on credit risk inherent in a bond. A premium is paid, based on a notional amount, from one counter party to a second counter party in exchange for a contingent payment should a defined credit event occur with respect to the underlying security. Cross-currency interest rate swaps are contractual obligations in which the principal amounts of Canadian fixed-income securities denominated in foreign currency are exchanged for Canadian currency amounts both initially and at maturity. Over the term of the cross-currency swap, counter-parties exchange fixed to fixed and fixed to floating interest rate cash flows in the swapped currencies. There are underlying securities supporting all swaps. Leveraging is not allowed. (ii) Forward foreign exchange contracts are contractual agreements to exchange specified currencies at an agreed upon exchange rate and on an agreed settlement date in the future. (iii) An equity index futures contract is an agreement to receive or pay cash based on changes in the level of the specified stock index. The following is a summary of the fund’s
proportionate share of the notional amount and fair value of derivative
contracts held by pooled funds at September 30, 2003. NOTE 5 INVESTMENT RISK MANAGEMENT Income and financial returns of the Fund
are exposed to credit risk and price risk. Credit risk relates to the
possibility that a loss may occur from the failure of another party to
perform according to the terms of a contract. Price risk is comprised of
currency risk, interest rate risk and market risk. Currency risk relates
to the possibility that the investments will change in value due to
future fluctuations in foreign exchange rates. Interest rate risk
relates to the possibility that the investments will change in value due
to future fluctuations in market interest rates. Market risk relates to
the possibility that the investments will change in value due to future
fluctuations in market prices.
Risk is reduced through asset class diversification, diversification within each asset class, quality and duration constraints on fixed-income instruments, and restrictions on amounts exposed to countries designated as emerging markets. Controls are in place respecting the use of derivatives (see Note 4). Forward foreign exchange contracts may be used to manage currency exposure in connection with securities purchased in foreign currency (see Note 4). NOTE 6 FUND EQUITY Section 8 (2) of the Alberta Heritage
Savings Trust Fund Act (the Act) states that the net income of the
Heritage Fund less any amount retained in the Fund to maintain its value
shall be transferred to the General Revenue Fund annually in a manner
determined by the Minister of Revenue NOTE 7 NET INCOME (LOSS) Investment income (loss) is comprised of
interest, dividends, amortization of discount and premiums, swap income,
security lending income and realized gains and losses, net of
write-downs, on investments. The Fund’s share of income (loss) earned
from externally and internally managed investment pools is net of
administrative expenses incurred by the pools. (see Note 9).
NOTE 8 INVESTMENT PERFORMANCE The following is a summary of the investment performance results attained by the Fund determined on a fair value basis: NOTE 9 ADMINISTRATIVE EXPENSES Administrative expense includes investment management, cash management, safekeeping costs and other expenses charged on a cost-recovery basis directly from Alberta Revenue. The Fund’s total administrative expense for the period, including amounts deducted directly from investment income of pooled funds is as follows: NOTE 10 COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to September 30, 2003 presentation. NOTE 11 APPROVAL OF FINANCIAL STATEMENTS These financial statements were approved by the Deputy Minister of Revenue. |
||
![]() |
||
Copyright © 2003 Government of Alberta. Revenue.Webmaster@gov.ab.ca |