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.”