Last week the Her­itage and Sta­bil­i­sa­tion Fund quar­ter­ly in­vest­ment re­port for the pe­ri­od June 30th 2025 was pub­lished. We will get to the de­tails, but let’s start by ad­dress­ing the is­sue of time­li­ness.

I have writ­ten about this in the past and hope­ful­ly it will im­prove go­ing for­ward. The time lag in re­port­ing means that cit­i­zens are asked to as­sess the stew­ard­ship of their sin­gle largest fi­nan­cial as­set us­ing da­ta that is at least six months stale. This type of re­port­ing lag is, in the po­litest pos­si­ble terms, in­ad­e­quate for a sov­er­eign fund man­ag­ing over US$6 bil­lion of in­ter­gen­er­a­tional wealth.

There should not be as much as a sev­en-month lag for a quar­ter­ly re­port and the year-end an­nu­al re­port, giv­en the more de­tailed prepa­ra­tion time should be be­tween three to four months. It isn’t a good prac­tice to have to piece to­geth­er the fund’s tra­jec­to­ry from doc­u­ments that ar­rive well af­ter the de­ci­sions that shaped them have al­ready com­pound­ed or even re­versed. Hope­ful­ly this gov­er­nance deficit is ad­dressed quick­ly.

With that caveat stat­ed, we can ex­am­ine what the re­port­ing tells us and al­so try to make rea­son­able in­fer­ences based on ac­tu­al mar­ket da­ta for the sec­ond half of 2025 in or­der to un­der­stand where the fund might be to­day.

The head­line num­bers from the last an­nu­al re­port for 2024 are, by any mea­sure, strong. The Fund de­liv­ered a 20.81 per cent re­turn for the twelve months end­ing Sep­tem­ber 30, 2024, com­fort­ably out­per­form­ing its strate­gic as­set al­lo­ca­tion bench­mark of 17.22 per cent by 359 ba­sis points. Net as­set val­ue reached US$6.09 bil­lion, up from US$5.39 bil­lion a year ear­li­er. To­tal com­pre­hen­sive in­come was US$1.07 bil­lion.

But re­turns are not earned even­ly and un­der­stand­ing how it was con­struct­ed mat­ters. There are two main eq­ui­ty cat­e­gories to this fund. The US Core Do­mes­tic Eq­ui­ty (up 37.38 per cent) and Non-US Core In­ter­na­tion­al Eq­ui­ty (up 31.12 per cent). They con­tributed 14.56 per­cent­age points of the 20.81 per cent to­tal re­turn. Fixed in­come con­tributed the re­main­der. The re­turn en­gine was eq­ui­ty mar­ket per­for­mance, am­pli­fied by a port­fo­lio ma­te­ri­al­ly over­weight eq­ui­ties rel­a­tive to its own ap­proved strate­gic al­lo­ca­tion.

The wind­fall prob­lem

That last line is both the wind­fall and the prob­lem, and it is a struc­tur­al point that has ex­ist­ed for quite some time. The HSF’s ap­proved strate­gic as­set al­lo­ca­tion tar­gets 35 per cent eq­ui­ties and 65 per cent fixed in­come. By Sep­tem­ber 30, 2024, the ac­tu­al split was ap­prox­i­mate­ly 50.6 per cent eq­ui­ties and 49.4 per cent fixed in­come. By June 30, 2025, the last re­port­ed quar­ter, eq­ui­ties had drift­ed fur­ther to 54.1 per cent. The Fund has been op­er­at­ing with a risk pos­ture al­most twen­ty per­cent­age points away from its pol­i­cy bench­mark on the eq­ui­ty side. That is not a round­ing er­ror. It is a fun­da­men­tal­ly dif­fer­ent port­fo­lio, one which we have ben­e­fit­ed from as the in­ter­na­tion­al eq­ui­ty (stock) mar­kets have out­per­formed.

How­ev­er, this drift ex­pos­es a deep­er struc­tur­al ques­tion that has shad­owed the HSF since its es­tab­lish­ment in 2007. The Fund’s very name en­codes a dual man­date, that is her­itage and sta­bil­i­sa­tion. These are not com­ple­men­tary ob­jec­tives. They are, in port­fo­lio con­struc­tion terms, fun­da­men­tal­ly in ten­sion.

A pure sta­bil­i­sa­tion fund ex­ists to in­su­late the fis­cal po­si­tion from com­mod­i­ty rev­enue volatil­i­ty (im­pact of low en­er­gy prices on Gov­ern­ment rev­enues). Its de­sign log­ic de­mands short time hori­zons, con­ser­v­a­tive as­set al­lo­ca­tion, and high liq­uid­i­ty. Why? Be­cause you can­not sta­bilise any­thing with as­sets that are them­selves volatile and may suf­fer draw­downs pre­cise­ly when com­mod­i­ty prices col­lapse.

A pure her­itage fund, by con­trast, serves in­ter­gen­er­a­tional wealth trans­fer. This means con­vert­ing our de­plet­ing nat­ur­al en­er­gy re­sources in­to a per­pet­u­al fi­nan­cial as­set. The best ex­am­ple of this is the Nor­way Pen­sion Fund.

Its mul­ti-decade hori­zon per­mits, in­deed re­quires, a growth-ori­ent­ed al­lo­ca­tion, typ­i­cal­ly 60 to 70 per cent or more in eq­ui­ties, with ca­pac­i­ty to ab­sorb mul­ti-year draw­downs be­cause li­a­bil­i­ties to fu­ture gen­er­a­tions sit decades awayThe HSF at­tempts to serve both mas­ters with­in a sin­gle port­fo­lio. Its strate­gic al­lo­ca­tion of 35 per cent eq­ui­ties, 65 per cent fixed in­come, is a prag­mat­ic com­pro­mise that sits un­com­fort­ably be­tween the two man­dates.

Too much eq­ui­ty risk for a pure sta­bil­i­sa­tion func­tion; too con­ser­v­a­tive for a pure her­itage ve­hi­cle. And the with­draw­al rules em­bed­ded in the HSF Act ef­fec­tive­ly treat the Fund as a sta­bil­i­sa­tion mech­a­nism, ty­ing draw­downs to pe­tro­le­um rev­enue short­falls.

The point is that we are ty­ing draw­downs to the pos­si­bil­i­ty of glob­al eq­ui­ty as­sets al­so be­ing un­der pres­sure. The per­for­mance of the tech­nol­o­gy sec­tor and the re­moval of the risk pre­mi­um for en­er­gy prices means that to date there has been no col­li­sion of out­comes. How­ev­er, the risk re­mains.

Risk man­age­ment

The op­er­a­tional re­al­i­ty re­in­forces the point. Dur­ing FY2024, the Gov­ern­ment with­drew US$369.9 mil­lion ex­e­cut­ed in two tranch­es in De­cem­ber 2023 and June 2024. A fur­ther US$150 mil­lion fol­lowed in No­vem­ber 2024 and US$260.8 mil­lion in Sep­tem­ber 2025 as con­firmed by the Min­istry of Fi­nance’s Re­view of the Econ­o­my 2025.

No de­posits were made in any of these pe­ri­ods. When the sta­bil­i­sa­tion trig­ger is pulled, the Fund should be liq­ui­dat­ing from its most liq­uid as­sets. These are short du­ra­tion fixed in­come. At least that’s how I would ex­pect a sta­bil­i­sa­tion fund should be­have. But if the Fund’s pri­ma­ry op­er­a­tional use is fis­cal sta­bil­i­sa­tion, the over­all al­lo­ca­tion should re­flect that re­al­i­ty. In­stead, the port­fo­lio’s in­vest­ment pref­er­ence has drift­ed to­ward the her­itage end of the spec­trum while its cash flow oblig­a­tions re­main firm­ly an­chored in sta­bil­i­sa­tion.

The first half of 2025 il­lus­trat­ed both the re­ward and the risk. In the first quar­ter, US eq­ui­ties fell while bonds ral­lied. This is pre­cise­ly the en­vi­ron­ment where an eq­ui­ty over­weight port­fo­lio un­der­per­forms its bench­mark. This is ex­act­ly what hap­pened.

The sec­ond quar­ter re­versed the pat­tern em­phat­i­cal­ly. Glob­al eq­ui­ties re­bound­ed sharply and the Fund’s eq­ui­ty over­weight be­came a pow­er­ful tail­wind, de­liv­er­ing a 7.30 per cent re­turn that crushed the bench­mark’s 4.97 per cent. NAV climbed to US$6.32 bil­lion, its high­est post-pan­dem­ic re­port­ed lev­el.

Cur­ren­cy am­pli­fied the sto­ry. The US dol­lar weak­ened ma­te­ri­al­ly in both quar­ters. The US dol­lar weak­ness me­chan­i­cal­ly boost­ed USD re­port­ed re­turns from in­ter­na­tion­al eq­ui­ties. Ap­pre­ci­ate that this is a trans­la­tion ef­fect that flat­ters re­turns in weak dol­lar pe­ri­ods and will re­verse when the dol­lar strength­ens. I should al­so add that we seem to be in a weak dol­lar en­vi­ron­ment so this re­ver­sal may not be on the hori­zon.

If we as­sume the fund was man­aged in the same way through to the end of 2025 we can use ac­tu­al mar­ket re­turns to guess how the fund has per­formed dur­ing the re­port­ing gap.

With­out get­ting in­to the de­tails, I would ex­pect a half-year 2025 re­turn of around sev­en per­cent where eq­ui­ty mar­ket per­for­mance once again dom­i­nat­ed. This would re­sult in a fund net as­set val­ue of around US$6.75 bil­lion. Af­ter net­ting the Sep­tem­ber 2025 with­draw­al of US$260.8 mil­lion and then ap­ply­ing fourth quar­ter re­turns to the re­duced base gives an es­ti­mat­ed year end NAV of ap­prox­i­mate­ly US$6.50 bil­lion.

If broad­ly cor­rect, the Fund will have grown NAV by ap­prox­i­mate­ly US$670 mil­lion over cal­en­dar 2025 de­spite ab­sorb­ing US$260 mil­lion in with­drawals. We should by now have a hard num­ber on this as op­posed to me hav­ing to do port­fo­lio math to try to work it out.

The fund per­for­mance based on my guess rep­re­sents a mean­ing­ful re­sult. But it is one de­liv­ered over­whelm­ing­ly by eq­ui­ty mar­kets through a port­fo­lio whose risk pos­ture has drift­ed well be­yond its strate­gic man­date.

And here lies the ten­sion that strong per­for­mance can ob­scure. The eq­ui­ty over­weight has been re­ward­ed hand­some­ly be­cause glob­al eq­ui­ty mar­kets have been broad­ly con­struc­tive. The Fund’s own com­pli­ance com­men­tary con­firms all man­date weights re­main out­side the al­low­able de­vi­a­tion bands. The an­nu­al re­port ref­er­ences an IMF tech­ni­cal as­sis­tance mis­sion and flags a po­ten­tial in­crease in the strate­gic eq­ui­ty al­lo­ca­tion. This would, at least, bring the pol­i­cy frame­work clos­er to the port­fo­lio’s ac­tu­al hold­ings.

But there is a cat­e­go­ry of risk that an­nounces it­self on­ly in ret­ro­spect. A strat­e­gy built on eq­ui­ty over­weight in a sov­er­eign sta­bil­i­sa­tion ve­hi­cle works splen­did­ly, un­til it doesn’t. The cor­re­la­tion risk of need­ing sta­bil­i­sa­tion cap­i­tal when eq­ui­ty mar­kets are al­so dis­tressed is not the­o­ret­i­cal. It has hap­pened be­fore, glob­al­ly and lo­cal­ly, and the cur­rent port­fo­lio de­sign of­fers no struc­tur­al in­su­la­tion against it.

The Her­itage and Sta­bil­i­sa­tion Fund has per­formed well. It has earned through ma­te­r­i­al with­drawals, and re­built its net as­set val­ue to like­ly record lev­els. But per­for­mance is not the same as de­sign. A US$6 bil­lion in­ter­gen­er­a­tional as­set de­serves both re­al time trans­paren­cy and a struc­ture that ac­knowl­edges the com­pro­mise be­tween her­itage and sta­bil­i­sa­tion or re­moves the com­pro­mise. Let us do this be­fore it is test­ed by a sce­nario the fund isn’t cur­rent­ly con­struct­ed to with­stand.

Ian Nar­ine is a fi­nan­cial con­sul­tant who is try­ing to sta­bilise the her­itage. Please send your com­ments to ian@ian­nar­ine.com