Alberta's Heritage Savings Trust Fund hits lowest value in eight years

A risky investment strategy by the Alberta Investment Management Corporation (AIMCo) cost Alberta's long-term savings fund $411 million, a legislative committee heard on Monday.

In combination with global market losses in February and March, Alberta's Heritage Savings Trust Fund was valued at $16.3 billion on March 31, its lowest point since 2011-12, according to the fund's annual report, released Monday.

The value was down about 10 per cent from the same time last year.

"You don't have to apologize for being hard on us," AIMCo CEO Kevin Uebelein told an all-party committee on Monday as the report was unveiled. "This was a quarter from hell and we deserve to be whacked around."

AIMCo currently manages the investment of 31 funds, including the heritage fund, major public sector worker pension funds, and some specialty funds for clients like the City of Medicine Hat and the Workers' Compensation Board.

The provincial corporation is under scrutiny after an investment strategy that bet against volatility in the market went badly when the coronavirus pandemic sent the global economy plunging. The corporation lost $2.1 billion on that strategy alone, prompting an external review.

In a report submitted on June 30, the reviewers said risk governance and culture at AIMCo are "unsatisfactory," and that employees didn't escalate concerns about the so-called VOLTS investment strategy to managers or the board quickly enough.

Information leak was financially damaging, AIMCo CEO says

On Monday, Uebelein repeated assurances that he and AIMCo's board have taken steps to ensure such drastic losses won't happen again.

"The scale of the losses experienced from VOLTS were beyond what we or our clients would want or expect, and I take full accountability for this outcome," he told the committee.

Uebelein also said a leak of information to media about the VOLTS losses in April exacerbated the losses.

"I can't put a dollar damage value on that leak," he said. "But it was real, and it was very disappointing to us."

For 2019-20, the annual rate of return for the Heritage fund was -5.1 per cent.

The committee also heard AIMCo has not hit its five-year goal for the rate of return on the heritage fund.

The annual report said the path to recover from the losses is "unclear," as are the economic effects of the COVID-19 and public health lockdowns.

AIMCo's performance is under additional scrutiny since the government last year passed legislation requiring the Alberta Teachers' Retirement Fund to use AIMCo as its investment manager. The changes also locked three huge public sector pension plans into using AIMCo.

The Opposition NDP opposes the changes. On Monday, NDP labour and immigration critic Christina Gray said the losses incurred by the heritage fund are gravely concerning. She again urged the government to reconsider consolidating management of public pension funds with AIMCo.

Under questioning by Gray in the legislature on Monday, Finance Minister Travis Toews defended the government's reliance on AIMCo.

"I'm confident that with the adjustments that are being made at AIMCo right now that AIMCo will continue to deliver great results for Albertans into the future," Toews said.

An Alberta finance official told the committee some of the heritage fund's losses have since been recouped as governments ramp up emergency spending and markets rebound.

Decline in value raises questions about fund strategy, economist says

Created by Premier Peter Lougheed in 1976, Alberta's nest egg was seeded with provincial oil revenues in the 1970s and early 1980s. Since then, Alberta governments have used the fund and its investment income to pay for nearly $45-billion worth of programs, services and infrastructure.

The 2020-21 provincial budget had projected receiving $2.6 billion in investment income this year, including from the heritage fund.

Toews' press secretary, Jerrica Goodwin, said on Monday actual investment income this year will be "much lower than budgeted." A more complete financial update is expected in August.

University of Calgary economics professor Trevor Tombe said the government may have to revise that plan. It will have to decide whether to withdraw more of the principal from the fund — permanently depleting its value — or to run a larger deficit to make up the difference, he said.

With government borrowing relatively cheap right now, Tombe said there could be a case for the government running a deeper deficit and keeping more money in the Heritage fund.

The fund is also less valuable than it used to be, he said. It raises questions about how governments are managing it.

"Right now we're engaged in the practice that is slowly depleting the value of the fund," Tombe said. "As losses occur, we eat them, and we shrink the principal of the fund. And then when gains occur later, we withdraw those as well, rather than repaying, if you will, the losses that we withdraw."

Goodwin said in a Monday email a loss in one year is not necessarily a sign of imprudent investments but indicates "market reality."

How the government uses income from the heritage fund is set out in legislation, and the government has no plans to change it, she said.

Though the government has not changed its investment policy since 2011, Toews intends to review it this year, she said.

"Taking risks is a necessary part of providing returns for investors and in this case Albertans," Goodwin wrote. "We expect AIMCo to assess risks and invest appropriately on behalf of Albertans."