Heritage
Fund Annual Report
2004-05 - Part 2
June
29, 2005
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Table
of Contents - Part 2
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Financial
Statements
Auditor's
Report
To
the Minister of Finance
I have audited the
balance sheet of the Alberta Heritage Savings Trust Fund as
at March 31, 2005 and the statements of operations and cash
flows for the year then ended. These financial statements are
the responsibility of the Fund's management. My responsibility
is to express an opinion on these financial statements based
on my audit.
I conducted my audit
in accordance with Canadian generally accepted auditing standards.
Those standards require that I plan and perform an audit to
obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation.
In my opinion, these
financial statements present fairly, in all material respects,
the financial position of the Fund as at March 31, 2005 and
the results of its operations and its cash flows for the year
then ended in accordance with Canadian generally accepted accounting
principles.
[original
signed]
Fred
J. Dunn, FCA
Auditor General
Edmonton, Alberta
May 20, 2005
Statement
of Operations
Statement
of Cash Flows
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.
The preamble to the Act describes the mission of the Fund as
follows:
"To provide prudent stewardship of the savings from Alberta's
non-renewable resources by providing the greatest financial
returns on those savings for current and future generations
of Albertans."
Note
2 Summary of Significant Accounting Policies and Reporting Practices
The recommendations
of the Public Sector Accounting Board of the Canadian Institute
of Chartered Accountants are the primary source for the disclosed
basis of accounting. Recommendations of the Accounting Standards
Board of the Canadian Institute of Chartered Accountants, other
authoritative pronouncements, accounting literature, published
financial statements relating to either the public sector or
analogous situations in the private sector are used to supplement
the recommendations of the Public Sector Accounting Board where
it is considered appropriate.
The accounting policies
of significance to the Fund are as follows:
(a) Portfolio
investments
Fixed-income securities, mortgages, equities, real estate
investments and absolute return strategy investments held
directly by the Fund or by pooled investment funds are recorded
at cost. Cost includes the amount of applicable amortization
of discount or premium using the straight-line method over
the life of the 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
Investment income is recorded on the accrual basis where
there is reasonable assurance as to its measurement and collectability.
When a loan becomes impaired, recognition of interest income
in accordance with the terms of the original loan agreement
ceases. Any subsequent payments received on an impaired loan
are applied to reduce the loan's book value.
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.
Certain derivative contracts, which are primarily interest
rate swaps and cross-currency interest rate swaps, are designated
as hedges of market risks for purposes of hedge accounting.
Hedge accounting recognizes gains and losses from derivatives
in the statement of income in the same period as the gains
and losses of the security being hedged. As a result, income
and expense from derivative contracts designated as hedges
are recognized in income on an accrual basis with gains and
losses recognized in income to the extent realized.
Where a hedge relationship
is designated, the hedge is documented at inception. The documentation
identifies the specific asset being hedged, the risk that
is being hedged, type of derivative used and the matching
of critical terms of both the hedged security and the hedging
derivative for purposes of measuring effectiveness. The derivative
must be highly effective in accomplishing the objective of
offsetting either changes in the fair value or cash flows
attributable to the risk being hedged both at inception and
over the life of the hedge.
Derivative contracts
not designated as hedges for purposes of hedge accounting,
which are primarily bond index swaps, equity index swaps,
equity index futures, forward foreign exchange contracts and
credit default swap contracts are recorded at fair value.
(c) Foreign Currency
Foreign currency transactions are translated into Canadian
dollars using average rates of exchange; except for hedged
foreign currency transactions, which are translated at rates
of exchange established by the terms of the forward exchange
contracts. Exchange differences on unhedged transactions are
included in the determination of investment income.
(d) Investment
Valuation
Portfolio investments are recorded in the financial statements
at cost. The fair value of investments is provided for information
purposes and is disclosed in Note 3 and Schedules A to E.
Fair value is the
amount of consideration agreed upon in an arm's length transaction
between knowledgeable, willing parties who are under no compulsion
to act.
Measurement uncertainty
exists in the fair values reported for certain investments
such as private equities; private real estate, loans, absolute
return strategies and other private placements. The fair values
of these investments are based on estimates where quoted market
prices are not readily available. Estimated fair values may
not reflect amounts that could be realized upon immediate
sale, nor amounts that ultimately may be realized. Accordingly,
the estimated fair values may differ significantly from the
values that would have been used had a ready market existed
for these investments.
Fair value of investments
held either directly by the Fund or by pooled investment funds
are determined as follows:
(i) Public fixed-income
securities and equities are valued at the period-end closing
sale price, or the average of the latest bid and ask prices
quoted by an independent securities valuation company.
(ii) Mortgages,
provincial corporation debentures and private fixed-income
securities are valued based on the net present value of
future cash flows. These cash flows are discounted using
appropriate interest rate premiums over similar Government
of Canada benchmark bonds trading in the market.
(iii) The fair
value of private equities is estimated by managers or general
partners of private equity funds, pools and limited partnerships.
Valuation methods may encompass a broad range of approaches.
The cost approach is used to value companies without either
profits or cash flows. Established private companies are
valued using the fair market value approach reflecting conventional
valuation methods including discounted cash flows and multiple
analysis.
(iv) The fair
value of real estate investments is reported at the most
recent appraised value, net of any liabilities against the
real property. Real estate properties are appraised annually
by qualified external real estate appraisers. Appraisers
use a combination of approaches to determine fair value
including replacement cost, direct comparison, direct capitalization
of earnings and the discounted cash flows.
(v) The fair value
of Absolute Return Strategy Pool investments are estimated
by external managers.
(vi) The fair
value of loans is estimated by management based on the present
value of discounted cash flows.
(vii) The fair
value of deposits, receivables, accrued interest and payables
are estimated to approximate their book values.
(viii) The fair
value of investments and any other assets and liabilities
denominated in a foreign currency are translated at the
year-end exchange rate.
(e) Valuation
of Derivative Contracts
Derivative contracts include equity and bond index swaps,
interest rate swaps, cross-currency interest rate swaps, credit
default swaps, forward foreign exchange contracts and equity
index futures contracts. As disclosed in Note 4, the value
of derivative contracts is included in the fair value of pooled
investment funds. The estimated fair value of derivative contracts
at the reporting date is determined by the following methods:
(i) Equity and
bond index swaps are valued based on changes in the appropriate
market based index net of accrued floating rate interest.
(ii) Interest
rate swaps and cross-currency interest rate swaps are valued
based on discounted cash flows using current market yields
and exchange rates.
(iii) Credit default
swaps are valued based on discounted cash flows using current
market yields and calculated default probabilities.
(iv) Forward foreign
exchange contracts and equity index futures contracts are
valued based on quoted market prices.
Note
3 Portfolio Investments
The majority of the
Fund's investments are held in pooled investment funds established
and administered by Alberta Finance. 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 March 31, 2005, 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 March 31, 2005, securities held by the Fund have an average
effective market yield of 2.79% per annum (2004: 2.11% per annum).
(b) The Canadian Dollar
Public Bond Pool is managed with the objective of providing above
average returns compared to the total return of the Scotia Capital
Universe Bond Index over a four-year period while maintaining
adequate security and liquidity of participants' capital. The
excess return is achieved through management of portfolio duration
and sector rotation. The portfolio is comprised of high quality
Canadian fixed-income instruments and debt related derivatives.
As at March 31, 2005, securities held by the Pool have an average
effective market yield of 4.48% per annum (2004: 4.20% per annum)
and the following term structure based on principal amount: under
1 year: 3% (2004: 2%); 1 to 5 years: 38% (2004: 40%); 5 to 10
years: 31% (2004: 30%); 10 to 20 years: 12% (2004: 10%); and over
20 years: 16% (2004: 18%).
(c) As at March 31,
2005, fixed-income securities held directly by the Fund have an
average effective market yield of 3.18% per annum (2004: 2.69%
per annum). As at March 31, 2005, fixed-income securities have
the following term structure based on principal amount: under
two years: 100% (2004: 100%).
(d) The Private Mortgage Pool is managed with the objective of
providing investment returns higher than attainable from the Scotia
Capital Universe Bond Index over a four-year period or longer.
The portfolio is comprised primarily of high quality commercial
mortgage loans (94.6%) and provincial bond residuals (5.4%). To
limit investment risk, mortgage loans are restricted to first
mortgage loans, diversified by property usage and geographic location,
and include a small portion of NHA insured loans. As at March
31, 2005, securities held by the Pool have an average effective
market yield of 5.29% per annum (2004: 5.50% per annum) and the
following term structure based on principal amount: under 1 year:
2% (2004: 7%); 1 to 5 years: 22% (2004: 23%); 5 to 10 years: 43%
(2004: 26%); 10 to 20 years: 12% (2004: 20%); and over 20 years:
21% (2004: 24%).
(e) As at March 31,
2005, Provincial corporation debentures have an average effective
market yield of 7.51% per annum (2004: 7.10% per annum) and the
following term structure based on principal amounts: 5 to 10 years:
100% (2004: 100%).
(f) Investments in loans
are recorded at cost. The fair value of loans is estimated by
management based on the present value of discounted cash flows.
As at March 31, 2005, investment in loans, at cost, include the
Ridley Grain loan amounting to $91,245 (2004: $91,245) and the
Vencap loan amounting to $2,053 (2004: $1,899). The increase in
the carrying value of the Vencap loan resulted from amortization
of the loan on a constant yield basis.
-
Under the terms
of the loan to Ridley Grain, 11% Participating First Mortgage
Bonds due July 31, 2015, interest is compounded semi-annually
and payable annually to the extent of available cash flow
and any shortfall is to be deferred and capitalized. The principal
of $91,245 and deferred interest is repayable on or before
July 31, 2015. Deferred interest at March 31, 2005 amounted
to $92,517 (2004: $88,415). Grain throughput volumes are the
main determinant of profitability of the grain terminal and
the value of the loan to the Fund. Due to the uncertainty
of forecasting the grain throughput volumes, income from the
participating bonds is recognized when it is measurable and
collectable.
-
The principal amount
of the Vencap loan, amounting to $52,588, is due July 2046
and bears no interest.
(g) The Overlay Pool
provides participants with a quick, effective and efficient means
to achieve tactical asset allocation opportunities without incurring
undue transaction costs in the underlying investments. Long or
short exposures to respective asset classes are obtained through
synthetic instruments on a largely unfunded basis using equity
index futures contracts. Approximately 5% to 10% of the Pool's
notional exposure in Canadian and US futures contracts is supported
by cash and short-term securities. The Overlay Pool is comprised
of the “long” position through US futures contracts,
the “short” position through Canadian futures contracts,
and the “cash securities” position through money market
securities. Taken together these three positions reduce exposure
to Canadian equities and increase exposure to U.S. equities.
(h) The Domestic Passive
Equity Pooled Fund is managed on a passive approach with the objective
of providing investment returns comparable to the Toronto Stock
Exchange S&P/TSX Composite Index. The portfolio is comprised
of publicly traded Canadian equities and structured investments
replicating the S&P/TSX 60 Index. 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 five years or less.
(i) The Canadian Pooled
Equity Fund is managed with the objective of providing competitive
returns comparable to the total return of the S&P/TSX Composite
Index while maintaining maximum preservation of participants'
capital. The portfolio is comprised of publicly traded equities
in Canadian corporations. Risk is reduced by prudent security
selection, while remaining sector neutral.
(j) The externally managed
Canadian Equity Enhanced Index Pool allows participants the opportunity
to gain investment exposure to the Canadian large cap equity market.
The performance objective is to provide returns higher than the
total return of the S&P/TSX Composite Index over a four-year
moving average period. The portfolio is comprised of publicly
traded equities in Canadian corporations. The enhanced index generates
a consistent level of return above the Index with relatively low
risk.
(k) The Canadian Large Cap Equity Pool consists of multiple portfolios
of publicly traded Canadian equities. The portfolios are actively
managed by external managers with expertise in the Canadian large
cap equity market. The performance objective is to provide returns
higher than the total return of the S&P/TSX Composite Index
over a four-year period. Return volatility is reduced through
multiple manager investment style and market capitalization focus.
(l) The Growing Equity
Income Pool is managed with the objective of providing a steady
and growing stream of dividend income by investing in mature Canadian
and US companies with strong financial characteristics and growing
distributions. Risk is reduced by holding established, well-capitalized
companies. The performance of the pool is measured against the
total return of a custom S&P/TSX Composite Index for dividend
paying stocks.
(m) The Canadian Multi-Cap
Pool allows participants to gain investment exposure to the Canadian
equity market through internally managed structured investments
replicating the S&P/TSX 60 Index and external actively managed
Canadian small and mid cap investments. The performance of the
pool is measured against the total return of the S&P/TSX Composite
Index over a four-year moving average period.
(n) Publicly traded
US equities held in the S&P 500 Index Fund replicate the Standard
& Poor's (S&P) 500 Index. The performance objective is
to provide returns comparable to the total return of the S&P
500 Index over a four-year period. 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 (see Note 3(h)).
(o) The US Small/Mid Cap Equity Pool consists of one portfolio
of publicly traded United States equities. The portfolio is actively
managed by an external manager with expertise in the small cap
and mid cap US equity market. The performance objective is to
provide returns higher than the total return of the Russell 2500
Index over a four-year period.
(p) The Portable Alpha
United States Equity Pool consists of futures and swap contracts
which provide exposure to the U.S. equity market by replicating
the S&P 500 Index and
investments in value added absolute return strategies. The performance
objective is to provide returns higher than the total return of
the S&P 500 Index over a four-year period.
(q) The Europe, Australasia
and Far East (EAFE) Core and Plus Equity Pools consist of multiple
portfolios of publicly traded non-North American equities. EAFE
Core portfolios are actively managed by external managers with
European and Pacific Basin mandates. EAFE core managers have constraints
on foreign currency management and deviations from the MSCI EAFE
Index asset mix by country. The EAFE Plus portfolios are actively
managed by external managers with less constraints on country
allocation, stock selection, currency management and investments
in emerging markets. The performance objective is to provide returns
higher than the total return of the Morgan Stanley Capital International
(MSCI) EAFE Index over a four-year period.
(r) The externally
managed EAFE Passive Equity Pool consists of one portfolio of
non-North American publicly traded equities that replicates the
MSCI EAFE Index. The performance objective is to provide returns
comparable to the total return of the MSCI EAFE Index over a four-year
period.
(s) The External Managers Emerging Markets Equity Pool consists
of publicly traded equities in emerging markets around the world.
The portfolio is actively managed by external managers with expertise
in emerging markets. The performance objective is to provide returns
higher than the total return of the Morgan Stanley Capital Index
Emerging Markets Free (MSCI EMF) Index over a four-year period.
(t) The Private Real
Estate Pool is managed with the objective of providing investment
returns higher than the Consumer Price Index plus 5%. Real estate
is held through intermediary companies, which have issued to the
Pool, common shares and participating debentures secured by a
charge on real estate. Risk is reduced by investing in properties
that provide diversification by geographic location, by property
type and by tenancy. As real estate returns are positively correlated
to inflation and negatively correlated to returns from fixed income
securities and equities, the Pool provides diversification from
the securities market with opportunities for high return.
(u) The Foreign Private
Real Estate Pool is managed with the objective of providing investment
returns higher than the Consumer Price Index plus 5%. The Pool
provides diverse exposure to non-domestic real estate by investing
in foreign real estate backed securities and assets.
(v) 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.
(w) Private Equity Pools
are managed with the objective of providing investment returns
higher than the Consumer Price Index (CPI) plus 8.0%. The Private
Equity Portfolio consists of the Private Equity Pool, PEP98, PEP02,
PEP04 and the Foreign Private Equity Pool 2002. Private equity
investments are held in institutionally sponsored private equity
pools. Risk is reduced by avoiding direct investments in private
companies and by limiting holdings in any single pool. The Private
Income Pool invests in infrastructure related projects that are
structured to yield high current income with the objective of
providing investment returns higher than the CPI plus 6.0%.
(x) Where there has
been a loss in value of an investment that is other than a temporary
decline, the cost of the investment is written down to recognize
the loss (see Note 2 (a)). Where the fair value remains less than
cost, after recording a writedown, it is management's best judgement
that the decline in value is caused by short-term market trends
and is temporary in nature.
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. 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. 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.
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 March 31,
2005.
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.
The Standing Committee
on the Alberta Heritage Savings Trust Fund reviews and approves
the business plan of the Fund. In order to earn an optimal financial
return at an acceptable level of risk, the 2004-2007 Business
Plan proposed the following asset mix policy for the Fund
.
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 Finance.
Section 11(4) of the
Act states that for fiscal years subsequent to 1999 and until
the accumulated debt is eliminated in accordance with the Fiscal
Responsibility Act, the Minister of Finance is not required to
retain any income in the Heritage Fund to maintain its value,
but may retain such amounts as the Minister of Finance considers
advisable.
Note
7 Net Income (Loss)
Investment income 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 earned from externally and internally managed investment
pools is net of administrative expenses incurred by the pools
(see Note 8).
The investment income
for the year ended March 31, 2005 includes writedowns totalling
$34,425 (2004: $2,630).
Note
8 Administrative Expenses
Administrative expense
includes investment management, cash management, safekeeping costs
and other expenses charged on a cost-recovery basis directly from
Alberta Finance. The Fund's total administrative expense for the
period, including amounts deducted directly from investment income
of pooled funds, is as follows:
Note
9 Investment Performance (Schedule F)
The following is
a summary of the overall investment performance results attained
by the Fund determined on a fair value basis:
Note
10 Approval of Financial Statements
These financial
statements were approved by the Deputy Minister of Finance.
Schedule
of Investments in Fixed Income Securities - Schedule A
Schedule
of Investments in Canadian Equities - Schedule B
Schedule
of Investments in United States Equities - Schedule C
Schedule
of Investments in Non-North American Equities - Schedule D
Schedule
of Investments in Real Estate - Schedule E
Schedule
of Investment Returns - Schedule F
Year Ended March 31,
2005
TThe Fund uses a time-weighted
rate of return based on market values to measure performance.
The measure involves the calculation of the return realized by
the Fund over a specified period and is a measure of the total
return received from an investment dollar initially invested.
Total return includes cash distributions (interest and dividend
payments) and capital gains or losses (realized and unrealized).
The time-weighted rate
of return measures the compounded rate of growth of the initial
investment over the specified period. It is designed to eliminate
the effect that the size and timing of cash flows have on the
internal rate of return. The investment industry uses time-weighted
rates of return calculated using market values when comparing
the returns of funds with other funds or indices.
Investment returns for
the Fund are as follows:
The following
unaudited schedules (1 to 14) present the Heritage Fund’s
proportionate share of the ten largest public securities held
in pooled funds administered by Alberta Finance. For a detailed
listing of all investments, please call (780) 427-5364.
Glossary
ABSOLUTE
RETURN STRATEGIES
Absolute Return 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. Some of the
major types of strategies include long/short equity, fixed income
arbitrage, merger arbitrage, macroeconomic strategies, convertible
arbitrage, distressed securities and short selling.
ACCRUED INTEREST
Interest income that has been earned but not paid in
cash.
ACTIVE STRATEGIES
The strategies have two forms - security selection or
market timing. Security selection is the buying and selling of
securities to earn a return above a market index such as the S&P/TSX
Index for Canadian Stocks. Market timing is based on shifting
asset class weights to earn a return above that available from
maintaining the asset class exposure of the policy asset mix.
ASSET MIX
The percentage of an investment fund's assets allocated
to major asset classes (for example 60% equities, 5% real estate
and 35% fixed income).
BEAR MARKET
A market, in which, prices are declining. A "bear"
is a person who expects that the market or the price of a particular
security will decline.
BENCHMARK
A standard against which other are measured. For the
purposes of this report, benchmarks are established income indices
used to measure the health of the Fund's investment income.
BOND/DEBENTURE
A financial instrument showing a debt where the issuer
promises to pay interest and repay the principal by the maturity
date.
BOOK VALUE
See Cost Value
BULL MARKET
A market, in which, prices are rising. A "bull"
is a person who expects that the market or the price of a particular
security will rise.
CAPITAL GAIN
The market value received on sale of an asset beyond
its book value or purchase price. If the asset is bought for $50
and sold for $75, the realized capital gain (profit) is $25.
COST VALUE
The value for which an asset was acquired.
DEPOSITS
Liquid, short term investments. A cash equivalent.
DERIVATIVE CONTRACT
Financial contracts, the value of which is derived from
the value of underlying assets, indices, interest rates or currency
rates.
DIVERSIFICATION
Spreading investments to reduce risk by buying different
securities from various companies, businesses, locations and governments.
DURATION
Duration is the weighted average term to maturity of
the security's cash flows (i.e. interest and principal) and is
the measure of price volatility; the greater the duration of a
bond, the greater its percentage price volatility.
EMERGING MARKET
An economy in the early stages of development whose
markets have sufficient size and liquidity and are receptive to
foreign investment. Examples include China, Greece and Brazil.
EQUITY
Stocks; the ownership interest in a company.
EXTERNAL MANAGER
A third-party firm contracted to provide investment
management services.
FAIR
VALUE
Fair value is the amount of consideration agreed upon
in an arm's length transaction between knowledgeable, willing
parties who are under no compulsion to act. Fair value is similar
to market value.
FIXED INCOME SECURITIES
Interest bearing investments such as bonds and debentures
and money market investments such as treasury bills and discount
notes (see "Bond" and "Money Market Security").
GENERAL REVENUE FUND (GRF)
The central operating account for the Province of Alberta.
It is where most of the revenues received by the Province are
deposited and from where most of the expenditures are made.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP)
These are accounting guidelines formulated by the Canadian
Institute of Chartered Accountants (CICA) Accounting Standards
Committee (ASC), that govern how business report their financial
statements to the public. They are the principles under which
the financial statements of the Heritage Fund and other provincial
funds are prepared. These principles help ensure fair presentation
of the financial affairs of the Province.
INTEREST RATE SENSITIVE EQUITY
Equity whose return is expected to react to changes
in interest rates.
INVESTMENT PORTFOLIO
A pool of securities held as an investment. Holdings
of a diverse group of assets by an individual company or fund.
LARGE
CAP
Investment in larger capitalized firms. Within Canada,
companies with a market capitalization of greater than 0.15% of
the total Toronto Stock Exchange market capitalization.
LIQUIDITY
The ease with which an asset can be turned into cash
and the certainty of the value it will obtain.
MARKET VALUE
See fair value
MARKET (VALUE) RATE OF RETURN
The market value rate of return measures income (interest
and dividends) and capital appreciation or depreciation (realized
and unrealized). The method used to calculate the return is the
time weighted method.
Time-weighted rate of
return is designed to eliminate the effect that the size and timing
of cash flows has on the internal rate of return since the pattern
of cash flows vary significantly among funds. The investment industry
uses time-weighted rates of return when comparing the returns
of one fund to another fund or to an index..
MARKETABLE SECURITY
An investment for which there is usually a ready market.
MID-TERM INVESTMENT
A fixed income instrument (bonds, debentures, treasury
bills or discount notes) that matures in one to five years from
the date of acquisition.
MODIFIED
DURATION
A measure of price volatility of fixed income securities
(i.e. bonds). It is the weighted average term-to-maturity of the
security's cash flows (i.e., interest and principal). The greater
the modified duration of a bond, the greater its percentage price
volatility.
MONEY MARKET SECURITY
A fixed income security that matures within one year
form the date of acquisiton.
NET INCOME
The amount of earnings remaining after deducting expenses.
NET INVESTMENT INCOME
On a cost basis, includes realized capital gains, interest,
dividends, security lending income, derivative income and administrative
expenses. On a fair value basis, include in addition to the above,
current period changes in unrealized gains and losses.
NOMINAL RATE OF RETURN
A measure of return that does not exclude the effect
of inflation (see Real Rate of Return).
PAR VALUE
A value set as the face or principal amount of a security,
typically expressed as multiples of $100 or $1000. Bondholders
receive par value for their bonds at maturity.
PASSIVE STRATEGIES
These strategies involve investing to replicate the
performance of a given market index such as the S&P/TSX Composite
Index for Canadian stocks, or managing asset class exposure to
match the performance of an established policy asset mix.
REAL
VALUE OR REAL RATE OF RETURN
A measure of value or return after accounting for inflation.
It is equal to the nominal value or return less an amount for
inflation.
REALIZED AND UNREALIZED
Terms generally used to describe capital gains or losses.
A gain or loss is realized when the asset is sold; prior to sale
the gain or loss is unrealized and it is only a potential gain
or loss.
SECURITY
Any investment instrument such as a bond, common stock,
deed of trust on property, or any evidence of indebtedness or
equity.
SHORT-TERM INVESTMENT
An investment with a maturity date of less than one
year.
SMALL CAP
Investment in smaller capitalized firms. Within Canada,
companies with a market capitalization of less than 0.15% of the
total Toronto Stock Exchange market capitalization.
TERM-TO-MATURITY
The number of years left until a bond matures.
VOLATILITY
In financial matters, volatility of returns is the measurement
used to define risk. The greater the volatility, the higher the
risk.
Alberta
Heritage Savings Trust Fund Contact Information
Alberta Heritage
Savings Trust Fund
Room 434, 9515 - 107 Street
Edmonton, Alberta T5K 2C3
Phone: (780) 427-5364
Alberta Heritage Savings Trust Fund Standing
Committee
Chair: Ronald Liepert, MLA Calgary-West
Deputy Chair: George Rogers, MLA Leduc-Beaumont-Devon
Members:
Wayne Cao, MLA Calgary-Fort
Hector Goudreau, MLA Dunvegan-Central Peace
Hugh MacDonald, MLA Edmonton-Gold Bar
Weslyn Mather, MLA Edmonton-Millwoods
Barry McFarland, MLA Little Bow
Hung Pham, MLA Calgary-Montrose
Lloyd Snelgrove, MLA Vermilion-Lloydminster
Committee Clerk to the Standing Committee
Karen Sawchuk
Endowment Fund Policy Committee
Honourable Shirley McClellan, Minister of Finance
Members:
Mel Knight, MLA Grande Prairie-Smoky
Carol Haley, MLA Airdrie-Rocky View
Alvin Libin, Balmon Holdings
Rob Jennings, Jennings Capital Inc.
Bill Hutchison, Money Ware Inc.
Robert Phillips, R.L. Phillips Investment Inc.
John Swendsen, National Bank of Canada
Brian Manning (ex officio), Deputy Minister of Finance
Secretary
Gail Armitage, Executive Director, Alberta Finance
Investment Manager
Jai Parihar, Chief Investment Officer, Investment Management Division,
Alberta Finance
Auditor
Auditor General of Alberta
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