The Heritage and Stabilisation Fund (HSF) may have lost value right now because of the government’s recent withdrawal and the state of the global economy, but according to one local financial expert, when the COVID-19 crisis is over the fund will grow in value.
In explaining that the HSF is tied to the US stock market, UWI Lecturer and Chartered Financial Analyst, Prakash Ramlakhan told Guardian Media, “When the pandemic is over and the economies recover, you are going to see an appreciation of the shares and the value of the fund will increase over time.”
But how does the stock market really work and what effect does it have on the country’s HSF?
T&T established in 2007 a Sovereign Wealth Fund, which is a state-owned investments fund that comprises pools of money derived from the country’s reserves.
This is the country’s equivalent of an individual’s “rainy day” fund otherwise known as money used in hard times. T&T’s HSF had a value of US $1.76 billion in 2007, it’s value appreciated to US $6.25billion as of September 2019 and with the recent withdrawal the country has and estimated US $1.5billion dollars less than the last reporting period.
The final value of the fund is yet to be determined as it fluctuates and this is due to the fact that it is not placed in regular bank account overseas—it is invested in international stock markets (the United States primarily).
In an interview with Guardian Media, chartered account and vice chairman of the Stock Exchange, Ian Narine said, “Most people don’t participate in the stock market directly, but the stock market actually has a direct influence on most people’s lives.”
Narine remarked that if someone has put aside money to be invested in a pension—those pension funds would be invested in the stock market.
According to Narine, the HSF is like the country’s “rainy day” fund or pension fund and it is invested in the stock market—and therefore should be concern of all nationals of T&T, the owners of the funds.
Ramlakhan explained the stock market in the following way, “The stock market is a place where buyers and sellers of stock meet and transact, where stocks are really units of ownership of a business entity.”
A stock market is comprised of public companies, where any member of the public can own shares in a company or company stock, also known as equity. When a company moves from being private to public, it offers shares to the public so that individuals can share in the prosperity and growth of the company.
For example, if a company issues 1000 shares at $1 each, then the owner of 10 shares will have $10 or one per cent of that company’s stock or equity. When someone owns a company they can expect to get a return on their investment in the form of dividends (money paid to holders of shares after the company makes a profit) and capital appreciation (when the value of the shares increase). An individual can invest in as many companies as he or she wants.
As of September, T&T’s HSF fund has allocated 38.4 per cent in equities and 61.6 per cent in bonds. Bonds are instruments that also pay returns in the form coupon or interest payments, but unlike a company that can last for as long as the management runs it effectively, a bond has an expiration or maturity date.
Approximately 83 per cent of T&T’s HSF is invested in the US markets and 17 per cent in non-US market, in international equities. According to Narine, T&T’s HSF has benefited from capital appreciation in the US stock market as in the last five years it has been growing or trending upwards for the most part.
He also indicated that when interest rates fall bond prices rise, and when this happens the value of the bonds that an individual holds increases. Narine indicated that the HSF has been in a declining interest environment for the past 10 years or more, “and even now with this crisis, interest rates have come down, which would positively impact the fund.”
However, the advent of COVID-19 has also created massive uncertainty in the market, according to Narine, which can translate into the value of the HSF decreasing, as the increase in bond value may not be enough to withstand the shocks from the companies that are affected and therefore a loss in the value of some of the equity in companies.
In spite of this Ramlakhan noted, “Even though the share price of some of the companies may have fallen, and the value of the fund declines–which is normal—they (the HSF fund manager) may have no intention to sell the shares, they will just hold on.”
He noted that when the disruption from COVID-19 subsides and global economies rebound, share values will increase once more along with the overall value of the HSF.
Over the years the public debate has been about the delineation between the Heritage Fund, to be used for savings for future generations and the Stabilisation Fund that is there to assist the government in the a time of a shortage in revenues.
Both of finance professionals noted that knowledge of how the stock market works and how it impacted the HSF would empower citizens to hold government accountable and ask questions with regard to its decisions and policies on how the fund is managed and structured.