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Alberta royalty fund faces steepest tumble ever; down to US$7.2 billion For first time in its history, fund will not deliver dividend to provincial coffers Gary Park PNA Canadian Correspondent
As the Bears mauled the Bulls on North American stock markets the spring and summer, they stripped C$1.3 billion (US$845 million) from the value of the Alberta Heritage Savings Trust Fund, leaving the province’s royalty nest egg at C$11.1 billion (US$7.2 billion).
As a result, the fund — Alberta’s equivalent of the Alaska Permanent Fund — is headed for its worst year since it was established in 1976.
The government has projected a C$643 million investment loss for the current fiscal year, the first time in the fund’s history that it will not deliver a dividend to provincial coffers.
For the past 10 years, the government, rather than using investment income to build the fund, has opted to use the profits to counterbalance volatile energy prices and help keep Alberta deficit-free.
Over that decade, the fund’s investment income has totaled C$8.74 billion (US$5.68 billion).
Half in equities Half of the fund’s portfolio is in equities while the other half is invested in bonds, real estate, mortgages, private equities and absolute return strategies.
Alberta Revenue Minister Greg Melchin said the stock market, which he described as “one of the worst since the 1930s,” was to blame for the fund losses, despite some of the most robust oil and natural gas prices on record.
He said there are no plans to meddle with the strategy of investing in equities to boost the fund’s value over the long haul, arguing the history of the stock market proves that equities are superior to fixed-income investments.
Melchin said studies have indicated that investing solely in fixed-income instruments would cost the fund an average C$125 million (US$81 million) a year in income.
The fund lost 6.4 percent of its total value in the second quarter of the 2002-03 fiscal year, and saw a 14.1 percent drop in the value of its equities, but Melchin held out hope for the rest of the year, noting that there has been a “fairly significant rebound” in the stock markets since the end of September.
Meanwhile, the future of the fund continues to be the subject of government-initiated debate.
Government surveying residents In a current province-wide survey, the government is asking residents how the fund should be operated, suggesting four options ranging from keeping it primarily as an endowment fund, to a source of funding for capital projects, to using the fund to pay off Alberta’s remaining debt of C$5.2 billion (US$3.4 billion).
Former Alberta premier Peter Lougheed, who was instrumental in creating the fund, issued a rare public statement rejecting any notion of changing the fund’s role from a savings account to what some have described as a “slush fund” that politicians could raid whenever they chose.
The response from Albertans to past surveys has tended to favor reinvesting profits to allow the fund to resume the growth that was capped in 1986 and build a nest egg for a time when energy revenues no longer account for about 25 percent of Alberta’s revenues.
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