Province to review investment strategy for Alberta's battered Heritage fund
'A strategy that had been a perennial winner really was quite a large loser'
The Alberta government is launching a review of the investment policy for Alberta's Heritage Savings Trust Fund, which was battered by heavy losses earlier this year.
At the fund's annual general meeting in Edmonton on Thursday, Alberta Treasury Board and Finance assistant deputy minister Lowell Epp announced his department will launch a "major review" of the $17-billion fund's overall investment strategy and asset portfolio.
The review will be the first of its kind since 2011. It comes after a year that saw the Heritage fund — a rainy-day account financed by oil and gas royalties — pummelled by COVID-19 and risky investment decisions.
The portfolio hit its lowest value in eight years this spring after a volatility-based investment strategy left the fund's investments vulnerable to the economic toll of the pandemic.
"There is a legislative requirement to invest the Heritage Savings Trust Fund in order to maximize long-term earnings with a prudent level of risk," Jerrica Goodwin, a spokesperson for Treasury Board and Finance, said in an emailed statement Friday.
"This internal review will take place over the next year and will only evaluate how the fund is invested. This is not a review of the purpose of the fund, how it is used, nor will it consider changes to legislation."
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Kevin Uebelein, CEO of the Alberta Investment Management Corporation (AIMCo), which manages the Heritage fund, said he only learned of the review at Thursday's meeting but wasn't surprised.
The review could result in changes to the fund's overall asset mix, and how much risk its investments are allowed to take, Uebelein said.
"That kind of review, which is going to be thinking about the investment thesis, the investment policy, and then ultimately, the asset allocation that comes from that policy — those are all the responsibility of the Alberta government," Uebelein said in an interview Friday.
"How does that impact the investment philosophy of the Heritage fund? Those are conversations that hopefully both the government and AIMCo will be able to have together."
AIMCo operates at arm's-length from the government. In addition to the Heritage fund, it manages 30 other government investment funds, along with three huge public sector pension plans for nearly 375,000 Albertans.
Uebelein said AIMCO's investment strategy was ill-equipped to handle the unprecedented economic volatility caused by the pandemic.
AIMCo has succeeded in taking measured investment risks for years but this past year was the exception, he said.
The fund's weakness was in an investment strategy that saw it make bets against volatility in the markets. This spring, amid unprecedented swings in the market, AIMCo lost billions on derivatives, investments that pay off only if stock prices remain stable.
'An extremely painful lesson'
"It had been for many years quite a successful strategy. And then there was a week in March, I remember it, it's sort of tattooed in my psyche," Uebelein said.
"The world experienced volatility like it really never seen before and a strategy that had been a perennial winner really was quite a large loser.
"That strategy is shut down now … And that was an extremely painful lesson."
AIMCo came under fire this spring when it lost $2.1 billion on the volatility-based investment strategy.
The missteps cost the Heritage fund $411 million. In combination with global market losses in February and March, the fund was valued at $16.3 billion on March 31, its lowest point since 2011-12, according to the fund's most recent annual report, released in July.
The value was down about 10 per cent from the same time last year.
The value of the Heritage fund dropped $1.9 billion during 2019-20 — $1 billion was transferred to the province's general revenue fund, and net losses, including unrealized losses, were $887 million for the fiscal year.
The investment breakdown included 44.8 per cent in equities, 19.5 per cent in fixed income and money market and 34.9 per cent in inflation-sensitive and alternative investments.
'A marathon recovery'
Uebelein said AIMCo has already analyzed its losses extensively and is making changes to the investment portfolio.
"Accountability includes being willing to talk about what happened, what we're doing," he said.
"It includes making the necessary changes to the organization to make sure that those things never happen again and that we will learn and that we improve from that."
The Heritage fund has slowly started to recover. As of June 30, the fund was worth $17.2 billion.
Investment income for the quarter was pegged at $4 million with a five per cent rate of return.
Despite the gains, Uebelein said it will take years for the account to fully recover.
"You know, that may sound quite promising, but I just have to say, the recovery for the Heritage fund is really quite like the recovery in all of our lives and the economy writ large," he said.
"We're in a marathon recovery here. It's not going to happen overnight. And we have to find a gear so that we can grind through this."
'This fund belongs to us'
NDP MLA Shannon Phillips took issue with the way the review was announced. Epp first confirmed it during an informal question-and-answer period with an audience member at Thursday's AGM.
Phillips said Albertans deserve clear communication from the finance minister and open consultation on any potential changes to the investment fund.
"This is a major announcement that the government was undertaking in secret that they let it slip last night," Phillips said.
She said has been "skulking around'' about AIMCo's investment losses since the portfolio started to suffer this spring.
"I think all Albertans understand that we went through a period of volatility. But what they don't understand is an attempt to serially cover it up by not levelling with us in the first place and having the media break the story."
Phillips said the review should be done with input from Albertans who are ultimately the stakeholders.
She said the reported losses revealed weaknesses in the governance and oversight of AIMCo, issues which will not be resolved without improved transparency from the province.
"This fund belongs to us," she said.
"You can't just go around losing $2 billion and have no consequences for that. So I think we should just level with Albertans about what those consequences are, and how they're going to fix that."