The value of the country’s Heritage and Stabilisation Fund (HSF) has fallen by close to US$268 million or TT $1.821 billion at the end of financial year 2021 when compared to its value at the end of 2020.
This was revealed by the annual report into the fund’s performance which showed that even though it recorded its best performance in its history, massive drawdowns by the Keith Rowley administration has meant a net fall in its overall value.
“As at the end of September 2021, the Fund’s Net Asset Value stood at US$5,463.9 million, down from US$5,731.8 million one year earlier. During the financial year, a total of US$892.7 million was withdrawn from the Fund. Of this amount, US$292.7 million was related to the petroleum revenue shortfall for the fiscal year ended September 2020 (Section 15 of the HSF Act), while the remaining US$600.0 million was withdrawn in accordance with Section 15A (1) (b) of the amended HSF Act, which allows for withdrawals from the fund for a declared dangerous infectious disease declared under the Public Health Ordinance,” the report read.
According to the annual report, the HSF, which is also T&T’s rainy day fund, returned 11.75 per cent for the financial year 2021, its strongest annual performance to date, up from 8.20 per cent in the previous financial year.
The fund’s performance was driven by its exposure to global equity markets. As a result of this, the Fund’s equity mandates contributed 11.46 per cent compared with 0.29 per cent for the fixed income mandates.
The report noted, “The fund’s return of 11.75 per cent exceeded its strategic asset allocation (SAA) benchmark by 3.00 per cent (or 300 basis points), the largest excess return since inception. This out-performance was mainly due to the fund’s overweight allocation to global equities over the financial year, which arose in part from a tactical decision to defer rebalancing the Fund.
“The US Russell 3000 ex Energy index surged 30.78 per cent during the financial year while the MSCI EAFE ex Energy index gained 24.71 per cent. In comparison, the US fixed income market, proxied by the Bloomberg Barclays US Aggregate index, lost 0.90 per cent.”
The success of the fund was based on the excellent performance of its equities and it reported that the decision not to rebalance its portfolio and take increased risk paid off.
According to the report for most of the financial year 2021, the global growth outlook in the major developed economies improved as acute public health risks were mitigated by the swift rollout of vaccines and the spread of the virus was largely contained.
With some level of protection against the virus, it posited that countries gradually eased restrictions enabling the re-opening of most economic sectors. This positive development in addition to continued fiscal and monetary stimulus measures as well as soaring corporate earnings, increased investors’ appetite for risk assets, which drove global financial markets higher.
However, in the closing months of the financial year, volatility in global markets increased markedly as a sharp pickup in inflation and inflation expectations raised the prospect of an earlier than expected shift in monetary policy. This, together with the rapid surge of several variants of the COVID-19 virus, raised serious doubts about an early end to the pandemic and prompted a sudden cooling of market sentiment, the report noted.
Despite the late sell-off of markets in the closing months of the financial year, global equity markets returned a solid performance, with the S&P 500 increasing by approximately 30 per cent and the indices in the major European and Japanese equity markets increasing by between 20 and 39 per cent.
In contrast, global fixed income markets barely managed to eke out a positive return for the financial year as the low yields and policy support measures increased investor demand for risk assets relative to safer, but low yielding, fixed income securities.
“During the financial year, management of the HSF faced several challenges arising from the exceptional buoyancy of the equity compared with the fixed income securities, the timing of government withdrawals and the fund’s operational and investment policy guidelines, which call for the quarterly rebalancing of the portfolio, whenever, in the fund’s actual holdings, the asset classes deviate from the approved policy weights by more than +/- 5 percentage points. In the second half of FY 2020 and into the first quarter of FY 2021, the contrasting performance between the Fund’s equity and fixed income mandates, combined with the sizeable government withdrawals under Section 15A, totalling US$900 million, raised the total weight of the equity mandates to roughly 40 per cent, compared with the policy weight of 35 per cent.” The report revealed.
At the end of December 2020, this figure rose to approximately 44 per cent.
“Using the authority provided in the operational and investment policy, the board took the tactical decision to temporarily postpone the quarterly rebalancing of the fund in December 2020, while maintaining a close monthly monitoring of market developments to see how the deviations evolve and to explore other policy options. The decision was influenced by the sharp increase in returns coming from the equity mandates and the transaction costs that could arise from the size of the needed rebalancing. The board also determined that while the tactical decision could have increased the risk of the Fund, the additional risk would have been adequately compensated,” the report read.
In terms of the macroeconomic environment it argued that for most of financial year 2021, market sentiment was largely bullish as the availability of multiple vaccines provided a clearer path out of the pandemic. The vaccine rollout facilitated the removal of lockdown measures in many countries, which boosted economic activity and freed pent-up demand.
Additionally, accommodative monetary policy and additional fiscal stimulus helped to sustain the economic resurgence from the pandemic. The favourable economic conditions helped many sectors to recover from losses sustained in the pandemic hit 2020 and pass on a sharp rise in prices as demand stayed ahead of supply.
In the last quarter of the financial year the report added, vaccine hesitancy, the emergence of highly-transmittable virus variants and persistent inflationary pressures threatened to stall the pace of growth as monetary authorities began to reassess the timing of the withdrawal of financial market support measures and rate increases. The prospect of an earlier than expected removal of policy support measures and monetary rate adjustments altered market sentiment and the pace of recovery towards the end of the financial year.
It said, “Despite the mounting headwinds to growth, the International Monetary Fund’s (IMF) October 2021
World Economic Outlook forecasts that global output is projected to grow by 5.9 per cent in 2021 following a contraction of 3.1 per cent in 2020.”