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Heritage and Stabilization Fund (HSF)

A sovereign wealth fund established by the Republic of Trinidad and Tobago

What is the Heritage and Stabilization Fund (HSF)?

Heritage and Stabilization Fund (HSF) is a sovereign wealth fund established by the Republic of Trinidad and Tobago. Founded in 2007, HSF was established to reinvest excess capital resulting from exports of natural gas.

 

Heritage and Stabilization Fund (HSF)

 

Like other sovereign wealth funds, Trinidad and Tobago’s HSF is owned by the government and managed by leaders from the Central Bank, the Ministry of Finance, and the private sector. As a sovereign wealth fund, HSF serves two purposes: to stabilize the economy in response to volatility in the energy sector and to save for future generations.

 

Summary

  • The Heritage and Stabilization Fund (HSF) is a sovereign wealth fund established by the Republic of Trinidad and Tobago.
  • The HSF serves two purposes: to stabilize the economy in response to volatility in the energy sector and to save for future generations.
  • As of June 2020, the HSF totaled $5.8 billion in assets under management.

 

Understanding Sovereign Wealth Funds

Sovereign wealth funds refer to state-owned investment funds that invest in various assets, such as equities, bonds, commodities, or real estate. As state-owned investment funds, SWFs are typically funded through foreign-exchange reserves held by the central bank or through export revenues.

As of November 2020, sovereign wealth funds totaled over $9 trillion in assets under management. Some of the biggest funds include Norway’s Government Pension Fund ($1.1 trillion), China Investment Corporation ($1 trillion), and the Abu Dhabi Investment Authority ($579 billion).

 

Understanding the Heritage and Stabilization Fund

On a global scale, HSF is relatively small, with $5.8 billion in assets as of June 2020. An act was passed by the Republic of Trinidad and Tobago requiring that 60% of excess tax revenues from petroleum exports be transferred over to the HSF.

As a resource exporting country, petroleum accounts for over 50% of Trinidad and Tobago’s total annual exports. Therefore, the assets in the HSF are accumulated from excess foreign exchange and tax revenues. Although the fund is operated by the central bank, investment decisions are partially made through external fund managers.

 

Portfolio Allocation

As of June 2020, HSF reported $5.8 billion of assets under management, which was distributed into four asset allocations:

  • U.S. fixed-income investments comprise 39.97% of the fund and include assets such as securitized investments and corporate credit. The investments achieved a return of 5.09%, relative to its benchmark of 2.90% (Barclays Capital U.S. Aggregate Bond Index).
  • U.S. equities comprise 21.61% of the fund, with substantial investments in financial services, technology, and consumer durables. US equities achieved returns of 21.59%, compared to its benchmark of 21.74% (Russell 3000 ex Energy Index).
  • U.S. short-duration fixed-income investments made up 20.78% of the fund and include higher allocations to spread products such as agency securities. These investments achieved a total return of 0.63%, relative to its benchmark of 0.29% (Bank of America Merrill Lynch US Treasury 1-5 year Index).
  • Non-U.S. International equities comprise 17.65% of the fund and include investments in the UK, Europe, and Japan. These investments achieved a return of 15.86%, compared to its benchmark of 15.49% (MSCI EAFE ex Energy Index).

 

HSF Portfolio Allocation

 

Investment Strategy and Performance

In terms of investment strategy, HSF focuses on medium- to long-term assets that are denominated in foreign currency. This results in a portfolio of fixed income securities and equities.

As the fund is operated by the central bank, decisions such as asset allocation, objectives, and benchmarks are decided on by the board. To achieve a target rate of return, HSF uses strategic asset allocations (SAA) to set target allocations for different asset classes.

When the returns differ, the portfolio is rebalanced back to their original allocations. To achieve a target rate of return. The HSF uses an SAA benchmark, which includes four indexes:

  • Barclays US Aggregate Bond Index
  • Bank of America/Merrill Lynch US Treasury 1-5 Years Index
  • Russell 3000 Energy Index
  • MSCI EAFE Energy Index

 

As of June 2020, the HSF portfolio achieved returns of 8.62%, compared to the SAA benchmark of 7.57%. Since the HSF’s establishment in 2010, the fund’s achieved annualized returns of 5.46%, compared to the SSA benchmark of 5.06%.

 

Additional Resources

CFI offers the Capital Markets & Securities Analyst (CMSA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Sovereign Wealth Fund (SWF)
  • Fixed Income Securities
  • Strategic Asset Allocation (SAA)
  • Corporate Credit Analysis

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