Updated 8 February 2025
On 5 February this post was originally published. I February 2025 the Standing Committee of the Alberta Heritage Savings Trust Fund met to hear from the President of Treasury Board and Minister of Finance, Nate Horner, his officials, and the Acting Chief Executive Officer of the Alberta Investment Management Corporation AIMCo, provide a high level overview of the new Heritage Fund. Secondly, the Committee received an update on the second quarter report of the Fund’s performance.
As a result of this testimony and questions and answers. some of the unanswered questions I had about the Fund “refresh” were clarified. I have made some changes from the original post which are highlighted in bold type. The transcript for the meeting has not been posted but when posted can be accessed through this webpage.
However, the analysis of the document still stands. To put it bluntly, this plan is based on a “hope and a prayer.” Answers from the ministry and AIMCo officials show that a very simple formula was used to harvest the 250-billion by 2050 result. Basically the figure assumes no further public money is added to the Fund. The rate of return required to reach this result is a 9 per cent annualized rate of return.
On 29 January, Premier Danielle Smith and Finance Minister Nate Horner hosted a press conference to announce a refresh of the frequently-maligned Alberta Heritage Savings Trust Fund (AHSTF). This refresh had been promised by the end of 2024.
Background
The Alberta Heritage Savings Trust Fund was established in 1975 after Premier Peter Lougheed won a renewed and strengthened mandate in the 1975 election. As a result of the election, Lougheed’s PC caucus grew from 49 to 69 (out of 75) with 62 per cent of the vote. Lougheed successfully campaigned on the creation of the AHSTF as well as a reduction of personal income taxes by a whopping 28 per cent. Little wonder Lougheed won a landslide majority as oil prices and royalty revenues gushed in.
The legislation was introduced in the fall of 1975 and required 30 per cent of non-renewable resource revenue (NRRR) be sent to the Heritage Fund, with investment income staying inside the Fund. Key criticisms of the Fund at the time included centralized control by the cabinet and weak accountability. Another problem was much of the Fund was invested in related government agencies such as Alberta Government Telephones and Alberta Social Housing. The circularity meant one part of the government consolidated entity was financing a related party. In addition, the fund was heavily invested in resource projects. From a macro-economic perspective keeping the money inside Alberta added fuel to an already over-heated economy.
Unfortunately, all good things must pass. By 1982 resource royalties fell precipitously, a reduced haul from the personal income tax reductions, and Lougheed’s aggressive expansion of the Alberta state put Lougheed ‘s government in a fiscal straitjacket. (For more detail see Related Posts from the Hyndman papers for that era.) As the electoral calendar clicked by, Lougheed announced a bold change to the Heritage Fund which was framed by his Provincial Treasurer Lou Hyndman as a “rainy day fund,” in which all investment income would be redirected into the government’s General Revenue Fund (GRF) to pay for promised services and underwrite the Fall 1982 re-election for the PCs. This change was effected by Bill 18.
Subsequently, in fiscal 1987-88 Don Getty’s government facing even lower oil prices than his predecessor made permanent the investment transfer to the GRF and eliminated any further nonrenewable resource revenue flowing into the AHSTF.
Prior to last month’s announcement, the only major change to the Heritage Fund was brought in by Ralph Klein and Jim Dinning in 1996. There was a controlled consultation process which resulted in a new investment structure. The changes finally addressed earlier criticisms by the investment community who would reap monetary benefits from Dinning’s new direction. Under the new AHSTF Act, the Fund would transition from its current mishmash of energy and resource development projects, low cost loans to provincial governments, and provincial agency investments like the Agricultural Financial Services Corporation to an international investment portfolio of equities, fixed income and real estate. This transition was scheduled for ten years. In addition, an inflation proofing formula was added to the legislation.
Renewing the AHSTF
Given the timing of the announcement, several days before Trump’s tariffs were supposed to be implemented, the news conference questions related primarily to the tariff situation and the maligned COVID-19 report. The only substantive question on the renewal related to the establishment of a Heritage Fund Opportunities Corporation.
The minimalist 16-page brochure supporting changes was a return to the original mission of Lougheed- to build an inter generational investment fund that would support government programs and services when, in Danielle Smith’s words, “many decades from now,” oil revenues would decline. The “ambitious target” set as promised by
Smith is to grow the Fund to “$250-billion or more” by 2050.
The brochure touts “the Alberta model” which consists of three basic principles and promises.
- Strategic investments: There is a strong focus on opportunities that maximize growth while supporting areas that matter to Albertans, such as technology, energy, and infrastructure.
- Global partnerships: The Model benefits from working closely with like-minded organizations and institutional investors to access premier investments, and bring new ideas and expertise back to the province.
- Strong governance: The Model is structured to ensure transparent and responsible investment management, so that every decision is made with the long-term interests of Albertans in mind. (Page 3- emphasis added)
The brochure rationalizes this strategy by repeating the Alberta’s longstanding public finance problem, that is, volatility of NRRR and over-reliance of the government on NRRR.
Governance
Governance will play a key role in driving growth. Good governance is defined to include “independence,” “professionalism,” and “transparency.” Although the UCP party passed a resolution last November to eliminate diversity, equity and inclusion programs, diversity of perspectives is touted as contributing to good governance:
A qualified board of directors representing different back- grounds – from both Alberta and abroad – will bring a diverse set of insights and perspectives, leading to smarter, more informed investment decisions. (Page 7)
The resolution passed by the UCP convention last November in Red Deer reads:
Ensure that all hiring practices within the Alberta Public Service and the Alberta Crown Corporations are based solely on merit, competency, and equality of all persons regardless of race gender, or creed and that all professional development programs and other training in diversity, equity, and inclusion (DEl) within the Alberta Public Service and the Alberta Crown Corporations be eliminated.
(Policy resolution 1- submitted by Banff-Kananakis, Highwood and Edmonton-McClung)
Why this apparent disconnect with party policy? It remains to be seen how diverse the perspectives will be and we will need to wait to learn how diverse the new HFOC board is. My prediction is not very diverse but filled with individuals who are “like-minded.”
The HFOC board will prioritize performance by “relying on the deep financial experience of its directors, the Corporation’s board will focus on improving long-term Heritage Fund investment growth outcomes.”
As far as transparency is concerned, the status quo will remain with regular quarterly and annual reporting along with “annual general meetings” which already are mandated. In short there is no improvement to the information given to the public. There is no mention of disclosing all investments as done by Norway on its $1.8-trillion USD pension fund and other major public sector pension plans.
At the Committee meeting both the Minister and his ministry staff spoke about the high level of transparency
Heritage Fund Opportunities Corporation
The biggest change to the Fund’s management is the establishment of a new provincial agency. A new Heritage Fund Opportunities Corporation HFOC chaired by Joe Lougheed, son of Peter Lougheed, is to be created, Lougheed is touted as having in-depth experience in governance and private equity. The HFOC has been established under the Alberta Business Corporations Act and will become a statutory corporation pending the introduction of amendments to the Act. Mr. Lougheed was not at the meeting.
The Heritage Fund Opportunities Corporation board and management team is established to oversee the Heritage Fund’s investments and growth strategy.
There is no mention where this organization will be headquartered but it will likely be in Calgary. This question was not raised at the meeting. According to the chair of the Opportunities Corporation, HFOC “will work closely with the Alberta Investment Management Corporation…. to deliver long-term growth of the assets of the Heritage Fund for future generations.” It is unclear whether some of AIMCo’s staff will be moved into the HFOC. It does seem that after a transition period, AIMCo will not have any long-term involvement in managing the new AHSTF.
From answers at the committee, the HFOC will determine investment policy which had been the purview of the Minister. AIMCo will continue to manage the 24-billion in the Fund but under the policy direction of HFOC’s board. How the accounting presentation of the two segments of the Fund was not discussed.
The new corporation:
will elevate Alberta’s global investment reputation under a robust governance framework. It will seek out strategic international investments and partnerships that drive new and profitable opportunities for Albertans, leading to better Heritage Fund investment outcomes over the long-term. (Page 7)
While HFOC will work “closely” with AIMCo, it will be the HFOC board which will drive investment policy. It is unclear whether much of the investment management will be farmed out to private hedge funds or private equity players as is the preference of conservative governments.
The Plan
The skeletal four-page plan depends on “a disciplined investment strategy and practice for the Heritage Fund to produce improved long-term, compounding returns.” (Page 11). The document contains various milestones for assessing performance, Progress Check for Short-Term Impact in 2027; 2035 will cap a “A Decade of Strategic Growth” including “legacy building,” a decade of strategic growth and a possible retail investment product for Albertans. By 2050, the priorities will include “sustaining growth with governance integrity,” and ” purposing the Heritage Fund legacy.”
There was questioning about the much advertised partnerships with sovereign wealth funds SWF. While AIMCo was not active in pursuing partnerships. Officials confirmed there were no limitations to AIMCo working with other SWFs.
relies exclusively on investment growth and reinvestment
Figure 1 on page 3 reveals the aggressive assumption used to reach $250-billion without any additional annual seeding of the Fund. HFOC can achieve this goal with a projected annual net return of 9%, compounded yearly.
The chart below shows the Heritage Fund’s actual performance based on the 2023-24 Annual report.
| Total Fund Performance | 2023-24 | 2022-23 | 5-year | 10-year |
| Fund rate of return (%) | 8.1 | 2.6 | 6.4 |
7.6
|
Source: AHSTF Annual Report, 2023-24, page 11.
This means that for the Fund to reach $250-billion without any government contributions, HFOC must earn annualized returns for the whole period of 140 basis points above AIMCo’s recent 10-year performance. This assumption means that the HFOC will have to take more risk than what AIMCo is currently taking.
Questioning by Samir Kayande of the New Democrats about the unnamed consultants’ analysis of the volatility and risk profile of the fund remained unanswered. This lack of clarity is worrisome and confirms that most of the plan had been written in the premier and minister’s office with direction to communications officials to add patriotic pictures of requisite mountains, public infrastructure, fields, requisite oil tanks, and the aurora borealis.
The implications for this more aggressive investment portfolio will mean a shift towards more private equity investments, real estate as well as infrastructure investments. Private equity, real estate, and infrastructure are investments that are not traded daily on stock exchanges are typically valued annually as part of the costs associated with that type of investment. Since the investor will be providing an evaluation opinion paid by the investor, reliability of these valuation opinions is less objective that a security traded heavily in financial markets. The evaluation adds to the costs of management. Moreover, private equity managers are known for aggressive management styles usually a strong anti-labour bias. In addition, fees paid to private equity managers are notoriously high which add to pressures to restructure and cut jobs.
Given the politicization of AIMCo which will essentially be left with managing public sector worker pensions, a greater politicization of managing Heritage Fund “public money” will inevitably be responsive to greater political direction hinted at in the above reference to dealing with like-minded organizations.
Given the high likelihood of greater politicization at HFOC, its investment bias will support the fossil fuel industry and have a home (Alberta) bias. This structure will force successor governments to face the grime prospects of write downs, pressures to add money from a stressed budget situation to keep the promise, leading to the collapse of political will to reach $250-billion promise.
Summary
The refresh of the AHSTF is a continuation of the premier’s penchant for aggressive communications and bold, visionary ideas (like the Alberta Pension Plan). The best which could be said at this stage is “Well, good luck.” The new fund will become as politically challenging to manage as investment managers and private equity titans fly into Calgary to sell “like-minded ideas” to Mr. Lougheed and his new board. Given the blithe assumption that the Fund can be grown to $250-billion by 2050 without government contributions understates the enormous risk that Alberta taxpayers will be underwriting with this breath-taking gamble.