Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1698931315979.pdf (Trinidad and Tobago)
Trinidad and Tobago Heritage and Stabilisation Fund ANNUAL REPORT 2012 Methanex Distillation Towers, Pt.

Lisas pg 2 TRINIDAD AND TOBAGO TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 PURPOSE The Heritage and Stabilisation Act, No.
6 of 2007 (hereinafter called “the Act”) established the Heritage and Stabilisation Fund (hereinafter called “the Fund”) with effect from March 15, 2007.
The Fund’s primary purpose is to save and invest surplus petroleum revenues derived from production business in order to achieve the following objectives: (a) Cushion the impact on or sustain public expenditure capacity during periods of revenue downturn whether caused by a fall in prices of crude oil or natural gas; (b) Generate an alternate stream of income so as to support public expenditure capacity as a result of revenue downturn caused by the depletion of non-renewable petroleum resources; and (c) Provide a heritage for future generations of citizens of Trinidad and Tobago from savings and investment income derived from the excess petroleum revenues.
Contents CHAIRMAN’S FOREWORD BOARD OF GOVERNORS GOVERNANCE OVERVIEW OF ACTIVITIES INVESTMENT REPORT Executive Summary Macroeconomic Environment Financial Market Review Strategic Asset Allocation Portfolio Performance Portfolio Risk APPENDICES Appendix I – Financial Year Portfolio Valuation Appendix II – Historical Performance Since Inception FINANCIAL STATEMENTS Report of the Auditor General Financial Statements Notes to Financial Statements 4 6 10 14 18 19 24 30 33 35 40 41 44 47 52 BpTT Savonette Platform pg 4 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 5 Chairman’s Foreword Chairman’s Foreword Central Bank of Trinidad and Tobago replaced the former Central Bank Governor Ewart Williams.
Mr. Ramcharan Kalicharan, is an accomplished investment manager in his own right, with over thirteen years’ experience in the finance industry.

These additions have been timely as the Board was engaged a myriad of activities geared towards the Review of the guiding overarching legislation, in respect of which the critical input and direction from our new Governors was valuable.
In this regard, we would also like to formally acknowledge and thank Mr. Ewart Williams and Mrs. Enid Zephyrine, who retired from the Board in July 2012 and November 2012 respectively.
The yeoman service of former Central Bank Governor Mr. Ewart Williams from the Fund’s inception and Mrs. Zephyrine assisted the Board greatly as the Board benefitted from their considerable experience and recommendations throughout the deliberations of the Board.. As we move forward to the New Financial Year, I would like to extend my sincere thanks to the Minister of Finance, fellow Governors of the Board and all Stakeholders who have provided tremendous support and continued contribution to the development of the Fund.
Ms. Avyann Ferguson Chairman Avyann Ferguson Chairman Over the financial year 2011/2012 the Fund fully deployed its Strategic Asset Allocation (SAA) Programme, the composition of which was designed to take advantage of the relative safety of fixed income assets financial whilst simultaneously mollifying the effects of volatile equity markets.
This is precisely aligned with the Fund’s objective to turn a non-renewable resource into an investment vehicle that would provide steady returns for the citizens of Trinidad and Tobago in both the present and future years-.

The Fund’s fixed income and equity portfolios both posted strong returns over the period, resulting in an overall impressive return of 10.73 per cent for the financial year ended September 30, 2012.
This return was some 55 basis points higher than the Fund’s composite benchmark and significantly higher than the 0.79 per cent return for the period ended September 30, 2011.

The return over the period is significantly higher than the average annualized return of 5.38 per cent since the inception of the Fund and also has the distinction of being the largest return for the Fund since its inception.
The growth witnessed over the past year has been due to both deposits, which caused the Fund to have more capital available for investment; as rebound well as a successful invest- ment strategy, which allowed the Fund to capitalize on the in global equity markets.

Oil and gas prices remained higher than budgeted throughout 2011/2012, spurring three deposits during the financial year 2012 totaling US$207.5 million in keeping with the Fund’s statutory requirements.
This compares with the US$451.4 million deposited to the Fund during the previous financial year.

As a result the Fund ended the financial year 2011/2012 with a net asset value of US$4,712.3 million, up from US$4,084 million for the year ended 2010/2011.

During the year the Board continued its work on the Review of the Fund, as mandated by the Act, and met with all major stakeholders to obtain key feedback and opinion in our effort to determine the way forward.
It is expected that when this process is complete the Fund’s governance structure and administrative functions would be improved, the benefits of which would continue to redound to the citizens as ultimate stakeholders in this institution.

Towards the end of the financial year, the Board saw the addition of two new members: Messrs. Jwala Rambarran and Ramcharan Kalicharan.
Mr. Rambarran, as incoming Governor of the pg 6 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 7 Board of Governors Ms. Avyann Ferguson Chairperson Banker/Attorney-at-Law Mr. Jwala Rambarran Member Governor - Central Bank of Trinidad and Tobago Mrs. Anushka Alcazar Member Human Resources Consultant Mrs. Enid Zephyrine Member Director - Ministry of Finance and the Economy Mr. Ramcharan Kalicharan - Member Finance/Investment Specialist Board Secretariat Mr. Michael L. Raymond Economic Policy Analyst, Ministry of Finance assigned to perform duties as Corporate Secretary Board of Governors Avyann Ferguson Chairman Jwala Rambarran Anushka Alcazar Ramcharan Kalicharan Alison Lewis Governance Petrotrin Isomerization Plant pg 10 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 11 Governance Governance The Board of Governors The Heritage and Stabilisation Fund Act provides that the Fund be governed by a Board of Governors who under section 9 shall perform the following duties: • The Board shall determine the governance structure and the operational guidelines of the Fund • The Board decides on the investment objectives and approves the manner in which the funds are to be strategically allocated and invested based on prudential standards used by the Central Bank.
inter alia, the Board has, the Principally, responsibility for the management of the Fund.

This notwithstanding, section 10 of the Act, enables the Board to delegate its management responsibility to the Central Bank of Trinidad and Tobago.

In December 2008, the Board of Governors delegated the management of the Fund to the Central Bank in keeping with the terms and conditions of delegation responsibility provided for in the legislation.
The Board maintains oversight of the investment strategy and function through receipt of quarterly and annual investment reports.

Following review by the Board, these reports on the operation and performance of the Fund are submitted to the Minister of Finance.
The Management of the Fund • The Central Bank is responsible for the day- to-day management of the Fund (to meet Investment Objectives as approved by the Board • The Central Bank reports quarterly and annually to the Board on the performance of the Fund • The Schedule to the Act details the responsibilities of the Central Bank including Withdrawals The Trinidad and Tobago Parliament • The Parliament, having passed the enabling legislation, continues to have ultimate oversight of the Fund.
This is exercised through the review of annual reports and audited financial statements, no later than four months following the end of the financial year.

• This reporting requirement gives the people of Trinidad and Tobago an opportunity to assess the Fund’s performance, thereby fostering transparency and accountability, and ensuring effective ownership of the Fund by the population.

Section 15 of the Act outlines the conditions under which funds may be withdrawn from the Fund.
Quantum: • Where the petroleum revenues collected in any financial year fall below the estimated petroleum revenues for that financial year by at least ten per cent, withdrawals may be made from the Fund.

Limitations on Withdrawals • The withdrawal is limited to sixty per cent of the amount of the shortfall of petroleum revenues for the relevant year; or • Twenty five per cent of the balance of the Fund at the beginning of that year, whichever is the lesser amount.
• The Act precludes any withdrawal where the balance standing to the credit of the Fund would fall below one billion US dollars if such withdrawal were to be made.

but not limited to the management and investment of assets and other resources of the Fund.

The Minister of Finance • The Minister of Finance advises the President on the appointment of the Board in accordance with the Act.
Whereas the Board of Governors is responsible for the Management of the Fund, the Minister of Finance is responsible for approving *deposits to and withdrawals from the Fund in accordance with the provisions of the Act.

*DEPOSITS AND WITHDRAWALS The Act outlines the deposit and withdrawal rules which the Ministry of Finance must apply regarding the Fund.

Deposits Sections 13 and 14 of the Act detail the conditions under which excess petroleum revenues must be deposited in the Fund.
Quantum: • A minimum of sixty per cent of the total excess (difference between estimated and actual) revenues must be deposited to the Fund during a financial year.

Estimated petroleum revenues are calculated based on defined international sources.

Timing: • Deposits to the Fund, if applicable, are to be made quarterly, no later than one month following the end of the quarter in which the deposit was calculated by the Ministry of Finance.
Quarter under the Act refers to the three-month period ending December, March, June and September of each year.

Overview of Activities BHP Billiton Trinidad and Tobago Greater Angostura Development pg 14 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 Overview of Activities Reports to Parliament HSF Review The Audited Financial Statements for the period ending September 30, 2011 were presented to the Parliament in March, 2012.
The 2011 Annual Report for the corresponding period was laid in Parliament simultaneously.

Public Accounts Committee The Board appeared before the Public Accounts Committee of Parliament in March and April 2012.

During the public hearing, the Board fielded questions from the Committee on the Audited Financial Statements of the Fund for the years ended September 30, 2008, 2009 2010 and 2011.

Deposits to the Fund The Fund began the fiscal year with a Net Asset Value of US$4,084 million.
In keeping with the HSF Act, the Government made three deposits to the Fund as follows: • US$26.2 million was deposited for the quarter ending in March; • US$69.4 million was made in respect of the June quarter; and • US$111.9 million was made on September 28, 2012.

For fiscal year 2012, a total of US$207.5 million was deposited to the Fund.

As per Section 22 of the HSF Act, the Board continued with its activities geared to the Review of the Fund.
During the year, consultation with key stakeholders continued with the Board actively engaging with: the Ministry of Finance, the Central Bank, the Ministry of Energy, the International Monetary Fund, the World Bank and representatives of private sector finance and energy companies to obtain feedback on the structure and administration of the Fund over the five-year period since inception.
Discussions were key to assess the efficacy of the existing legislation and garnering proposals for policy changes moving forward.

Membership of the IFSWF The HSF became a member of the International Forum of Sovereign Wealth Funds (IFSWF) in May 2012.

The IFSWF is a voluntary group of Sovereign Wealth Funds, such as the HSF, which meet to exchange views on issues of common interest, and facilitate an understanding of the Santiago Principles and SWF activities.
The Santiago Principles are generally accepted governance principles for SWFs, which were finalized in 2008.

Governance The Board of Governors of the HSF met all legal and statutory requirements in the discharge of its function and maintained its governance oversight as required by law during the review period.
Petrotrin Water Treatment Plant Investment Report Atlantic Facility, Point Fortin pg 18 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 19 Investment Report Investment Report from the fixed income holdings.

Among the four mandates, the US Core Domestic Equities had the strongest performance, producing an absolute return of 31.4 per cent.
The Non-US International Equity portfolio also posted a solid gain of 14.1 per cent.

As at the end of September 2012, the Fund’s Net Asset Value stood at US$4,712.4 million, up from US$4,084 million as at the end of September 2011.

During the financial year, the Government made three contributions to the Fund totaling US$207.5 million.
Executive Summary The financial year 2011/2012 represented a milestone for the Heritage and Stabilisation Fund which posted double-digit returns for the first time in its five and a half years of existence.

This robust performance reflected the rebound in global equity markets and was generated in an environment that was characterized by considerable volatility due to the sovereign debt crisis in Europe and weaker global growth.
These developments made investors wary about the prospects for the global economy and contributed to severe strains in financial markets.

As market tension rose, some relief was provided through monetary policy actions by the major central banks.
Further easing of financial stress and widespread optimism occurred following the European Central Bank (ECB) President Mario Draghi’s statement in late July 2012, that the ECB is “ready to do whatever it takes to preserve the Euro.” The short-lived effects of policy measures during the financial year resulted in the re-emergence of uncertainty, while the release of weaker-than- anticipated economic data dampened investors’ enthusiasm.
Given the increased risk to growth, the central banks of the advanced economies all maintained an accommodative monetary policy stance in financial year 2011/2012.

For financial year 2011/2012, the Fund returned 10.7 per cent, compared with gains of 10.2 per cent for the strategic asset allocation (SAA) benchmark and 0.8 per cent for the previous financial year.
The equity portion of the Fund contributed approximately 7.7 per cent to the total return, while the remaining 3 per cent came Macroeconomic Environment The global economic recovery suffered several setbacks in 2012, mainly on account of the fiscal and banking sector challenges facing several countries in the Euro Area, particularly Greece and Spain.
The ongoing challenges have not only threatened the stability and survival of the European Monetary Union, but have posed significant contagion risks to growth in both developed and emerging economies.

These developments led to increased financial stress causing the major central banks to adopt various policy measures throughout the year, aimed at stabilising financial market sentiments and stimulating economic growth.
In its October World Economic Outlook, the International Monetary Fund (IMF) lowered its projection for global growth in 2012 and 2013 to 3.3 per cent and 3.6 per cent, respectively.

It is now forecasting that the emerging economies will grow by 5.3 per cent in 2012, while in the advanced economies, activity is projected to expand by 1.3 per cent.
The United States (US) economy continued its moderate pace of recovery during 2012, despite concerns about the looming fiscal cliff and the US Presidential elections.

According to the IMF, economic activity in the US is forecast to increase by 2.2 per cent in 2012, a faster pace when compared with economic growth of 1.8 per cent in 2011.
There was some improvement in labour market conditions as the gain in nonfarm payroll employment was slightly higher, but the unemployment rate remained elevated at 7.9 per cent in October 2012.

Since mid-2012, the US housing market has shown a better- than-anticipated performance, which to a large extent, reflected the historically low rates offered on mortgage loans.

Meanwhile, consumer prices trended downwards, measuring 2.2 per cent in October 2012, compared with 3.5 per cent one year earlier.
Given that inflation has remained relatively subdued, the Federal Reserve left the target range for the federal funds rate unchanged at 0 to 0.25 per cent and indicated that the economic conditions are likely to warrant exceptionally low interest rate levels until mid- 2015.
In an effort to promote a stronger economic recovery, the Federal Reserve adopted other monetary policy measures during 2012 including the continuation of its “Operation Twist” pro- gramme for an additional six months and the commencement of a new round of quantitative easing, which involves the purchases of agency mortgage-backed securities at a pace of US$40 billion per month.
In the Euro zone, the ongoing sovereign debt crisis and banking sector funding pressures fuelled uncertainty in financial markets and dampened business and consumer confidence.

These challenges caused the major international rating agencies to lower the credit rating of a number of countries and financial institutions and much of the attention for the year focused on Greece and Spain.
In February 2012, the Euro zone finance ministers approved a EUR 130 billion bailout package for Greece, while Spain is expected to make a formal request for financial assistance to recapitalize its banking sector.

Economic conditions remained weak in the Euro zone where GDP contracted for a second consecutive quarter in September 2012 and is forecast to decline by 0.4 per cent for 2012.

The region’s strongest economy, Germany was projected to grow by 0.9 per cent in the 12 months to December 2012.
Euro area employment and manufacturing indicators were also disappointing as labour market conditions worsened and manufacturing activity declined for the fourteenth consecutive month in September 2012.
The unemployment pg 20 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 21 Investment Report Investment Report In Japan, real GDP contracted by 0.9 per cent in the third quarter of 2012 after expanding during the prior two quarters.

This downturn resulted from weak consumer spending and the fall-off in overseas demand.
Indicators of industrial and manufacturing activities also declined sharply during the September 2012 quarter.

In addition, the economy experienced falling consumer prices for the fourth consecutive month in September 2012.

Given the economic and price developments, the Bank of Japan maintained an accommodative monetary stance throughout the year.

rate rose to unprecedented levels, reaching 11.6 per cent in September 2012, up from 10.3 per cent one year earlier.
Among the member states, Spain and Greece recorded the highest unemployment rates which were in excess of 25 per cent.

Against this backdrop, the European Central Bank (ECB) implemented a series of policy measures throughout the year aimed at preserving the euro, averting a rapid escalation of the crisis and stimulating growth.
Some of these actions included the lowering of policy rates, injecting liquidity to ease bank funding pressures, and the buying of short-term government bond through the “Outright Monetary Transactions” (OMT) programme.

This programme is geared towards reducing the borrowing costs of highly indebted Euro zone member states.

While these policy measures alleviated tensions in some financial markets, their effects were generally short-lived as they failed to fully boost business confidence in the region.
According to the IMF, real GDP in the United Kingdom (UK) is projected to contract by 0.4 per cent in 2012.

However, the latest available GDP data indicated that the economy came out of recession during the third quarter of 2012, when it expanded by 1 per cent, following contractions in the prior three quarters.

This expansion reflected in part, activities related to the Summer Olympic Games.

In the manufacturing sector, output continued to contract as production and new export orders declined.
Meanwhile, inflationary pressures eased gradually in 2012, measuring 2.7 per cent in the twelve months to October, compared with 5 per cent for the corresponding period in 2011.

In an effort to stimulate the economy, the Bank of England kept its benchmark interest rate low at 0.5 per cent and increased the size of its asset purchase programme by GBP 50 billion on two occasions during 2012.
Table 1 GDP GROWTH: SELECTED DEVELOPED ECONOMIES QUARTER OVER QUARTER /PER CENT/ PERIOD US* EURO ZONE UK JAPAN Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 -5.3 -0.3 1.4 4.0 2.3 2.2 2.6 2.4 0.1 2.5 1.3 4.1 2.0 1.3 2.0 -2.8 -0.3 0.4 0.4 0.5 1.0 0.4 0.3 0.6 0.2 0.1 -0.3 0.0 -0.2 -0.1 -1.5 -0.2 0.4 0.4 0.6 0.7 0.6 -0.4 0.5 0.1 0.5 -0.4 -0.3 -0.4 1.0 -4.0 1.5 0.2 1.7 1.3 1.2 1.1 -0.3 -2.1 -0.5 2.3 -0.3 1.3 0.1 -0.9 Source: Bloomberg.
*US Data are annualised.
pg 22 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 23 Investment Report Investment Report Table 2 UNEMPLOYMENT AND INFLATION RATES: SELECTED DEVELOPED ECONOMIES UNEMPLOYMENT RATES /PER CENT/ INFLATION RATES YEAR-ON-YEAR /PER CENT/ PERIOD END US EURO ZONE UK JAPAN PERIOD END US EURO ZONE UK JAPAN Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep- Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 -0.4 -1.4 -1.3 2.7 2.3 1.1 1.1 1.5 2.7 3.6 3.9 3.0 2.7 1.7 2.0 0.6 -0.1 -0.3 0.9 1.4 1.4 1.8 2.2 2.7 2.7 3.0 2.7 2.7 2.4 2.6 2.9 1.8 1.1 2.9 3.4 3.2 3.1 3.7 4.0 4.2 5.2 4.2 3.5 2.4 2.2 -0.3 -1.8 -2.2 -1.7 -1.1 -0.7 -0.6 0.0 -0.5 -0.4 0.0 -0.2 0.5 -0.2 -0.3 Source: Bloomberg Source: Bloomberg.
pg 24 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 25 Investment Report Investment Report Financial Market Review Developments in the global financial markets revolved around the Euro area sovereign debt crisis and the deceleration in economic recovery.
At the start of financial year 2011/2012, a clear pattern emerged, whereby, political uncertainty and difficulties in meeting fiscal targets in a recessionary environment, pushed sovereign bond yields higher in some Euro zone countries.

This highly volatile period spurred the ECB to take policy actions which partially calmed financial markets.
Subsequently, investor scepticism over the adequacy of monetary actions contributed to another bout of increases in some governments’ borrowing cost, leading investors to increase their demand for assets in “safe-haven” nations.
Further monetary stimulus measures by the ECB and other major central banks during the second half of the financial year, eased tensions in financial markets once again, and provided the impetus for increased investor confidence which spurred double-digit returns in relatively riskier assets.

As such, the credit-sensitive sectors of the fixed income market and equity securities posted strong returns.
The Chicago Board Options Exchange Volatility Index (VIX), which is a widely used measure of market risk and is often referred to as the “investor fear gauge”, indicated that volatility in the US exhibited a gradual downward trend during the financial year despite increasing during the quarter ending June 2012.

The VIX index fell to 15.7 points at the end of September 2012, from 42.9 points at the beginning of the financial year.
However, over the twelve months to September 2012, the change in volatility was less evident as the Index averaged 21.1 points, compared with 21.5 points for the corresponding period one year earlier.

(Chart 1 ).

Chart 1 VIX Index 50 40 30 20 10 0 9/30/09 3/30/10 9/30/10 3/30/11 9/30/11 3/30/12 9/30/12 (a) Money Market Money market yields remained relatively low over the financial year ended September 2012 given the accommodative monetary policy stance by central banks the advanced economies.
The Federal Funds rate remained in the range 0 to 0.25 per cent for the entire twelve-month period.

Other short- term rates exhibited mixed movements.

The US 3-month London Inter-Bank Offered Rate in (LIBOR) declined marginally to 0.36 per cent, from 0.37 per cent in September 2011, whereas the US 3-month Treasury bill rate rose by 7 basis points to 0.09 per cent at the end of September 2012.
Accordingly, the TED spread, which represents the difference between the 3-month US Treasury bill rate and the 3-month LIBOR rate, narrowed to 26 basis points from 35 basis points at the end of the financial year 2011/2012 (Chart 2 ).

(b) Fixed Income Market Over the financial year, the US Treasury curve flattened as yields on the very short end rose marginally while those between the 2-year to 30-year segment declined (See Chart 3).
The sharpest movements in yields occurred at the intermediate portion of the curve, where the 5-year and 10-year rates fell 32 basis points and 29 basis points, respectively.

This overall downward trend masked the fluctuations that occurred over the review period.

During the first half of the financial year, signs of increased economic momentum in the US bolstered investor optimism and led to a selling off of Treasury securities.

This resulted in an increase in yields across the curve.
However, economic indicators for the second half of the year were generally less encouraging causing investors to demand perceived safer assets.

The extension of the Federal Reserve’s Operation Twist programme announced in June 2012 also placed downward pressure on longer-term rates.
pg 26 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 27 Investment Report Investment Report The broader US fixed income market, as represented by the Barclays US Aggregate Index , generated a total return of 5.2 per cent for the year ending September 30, 2012.
The Commercial Mortgage Backed Securities the best (CMBS) sector was performing sector, returning 11.7 per cent, compared with a gain of 3.8 per cent in the previous year.

The US Corporate sector also performed well, returning 10.8 per cent for the financial year 2011/ 2012.

The US Treasury and Agency sectors did not fare as well as the other sectors in the index, yielding total returns of 3 per cent and 2.6 per cent, respectively (Chart 4).
1 A market-value-weighted index of taxable investment-grade fixed-rate debt issues, including government, corporate, asset- backed, and mortgage backed securities, with maturities of one year or more.

(c) Equity Market Global equity markets performed strongly over the financial year ended September 2012 after posting negative returns during the previous year.
This improved performance was attributed in part to the monetary stimulus measures adopted by the major Central Banks, which increased investor optimism and appetite for risk.

The highest returns were observed in the German and US markets, where the gains substantially outweighed the losses made in the prior year.
In the US, the Standard and Poor’s (S&P) 500 and Russell 3000 Indices increased by 27.3 per cent and 27.5 per cent, respectively over the financial year 2011/2012, compared with declines of 0.9 per cent and 1.3 per cent, respectively for the corresponding period one year earlier.

In Europe, the German DAX 30 Index performed significantly better than the other markets, posting gains of 31.2 per cent over the year.
During the same period, the Japanese market, which was adversely impacted by the slowdown in the Chinese economy, was the worst performer as it returned a modest 2 per cent (Chart 5, refers).
pg 28 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 29 Investment Report Investment Report (d) Currency Market The currency market exhibited high levels of volatility during the financial year 2011/ 2012 as the economic situation in the Euro area weighed heavily on investor sentiment.
Intra period movements showed that the Euro weakened against the US dollar during periods of heightened uncertainty but strengthened when the ECB’s actions brought some relief to the market.

This latter trend was observed following the EU Summit, the Spanish bank bailout and the market-friendly Greek election results.

Nonetheless, the Euro depreciated vis-à-vis the US dollar over the financial year.
Similarly, the Japanese yen weakened against the US dollar but this movement was mainly because of the relatively unfavourable economic data from Japan, including the rising trend in the country’s trade deficit during 2012.

The Pound Sterling on the other hand, appreciated by 3.7 per cent vis-à-vis the US dollar over the financial year, recouping the loss of 0.8 per cent in the prior period.
pg 30 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 31 Investment Report Table 3 PORTFOLIO COMPOSITION RELATIVE TO THE APPROVED SAA /PER CENT/ ASSET CLASS Dec-11 Mar-12 Jun-12 Sep-12 Target Actual Actual Actual Actual Weight % of Fund % of Fund % of Fund % of Fund SAA S T H G I E W O I L O F T R O P Cash 0.00 0.00 0.00 0.00 2.37* US Short Duration Fixed Income US Core Domestic Fixed Income US Core Domestic Equity Non-US Core International Equity 25.00 24.86 23.70 24.26 23.46 40.00 40.46 38.83 40.16 38.13 17.50 17.98 19.72 18.99 18.82 17.50 16.70 17.75 16.59 17.22 *This cash represents the contribution made by the Government on September 28, 2012.
Investment Report Strategic Asset Allocation Portfolio Desired Allocation In 2008, the Board of Governors approved the Strategic Asset Allocation (SAA)2 for the Fund.

Given the onset of the financial crisis, the three- year implementation of the SAA was delayed until August 2009.

By January 2011, the Fund’s investment portfolio3 was fully invested in the four major asset classes shown in Chart 7 below.
Portfolio Composition For most of the financial year ended September 2012, the asset classes of the Fund deviated from their Strategic Asset Allocation (SAA), but these deviations were all within the allowable range in which the asset weights can vary.

Indeed, the composition of the portfolio is expected to diverge from the SAA from time to time, due to changes in assets’ market values and as a result of contributions to or withdrawals from the Fund by the Government.
Throughout the financial year, the Fund had an overweight allocation to US Core Domestic Equities relative to its SAA weight.

As at the end of September 2012, this overweight position was 1.3 per cent.

The other asset classes carried allocations below their target weights but these were magnified by the Government’s contribution at the end of the financial year, which accounted for 2.4 per cent of the Fund’s net asset value.
The Fund’s SAA and the portfolio composition over the 2011/2012 financial year are shown in Table 3.

2The approved Strategic Asset Allocation (SAA) is considered to be the optimal mix of assets that is expected to meet the long term investment objective of the Fund, both in terms of risk and return.
3Section 4 of the HSF Operational and Investment Policy states that the Central Bank may hold cash and cash equivalent in order to cover day-to-day liquidity needs and the remaining portion called the Investment Portfolio would be invested in accordance with the strategic asset allocation (SAA) approved by the Board.
pg 32 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 33 Investment Report Investment Report Fund Value Over the financial year 2011/2012, the value of the Fund increased on account of the investment returns and deposits made by the Government into the Fund.

As at September 30 2012, the Fund’s Net Asset Value stood at US$4,712.4 million, compared with US$4,084 million as at the end of September 2011.
During the financial year, the Government made three contributions to the Fund totaling US$207.5 million.

In April 2012, US$26.2 million was deposited for the quarter ending in March.

A second contribution in the amount of US$69.4 million was made in July in respect of the June quarter, while a final contribution of US$111.9 million was made on September 28, 2012.
Portfolio Performance The financial year 2011/2012 has been a milestone for the HSF as the Fund’s investment portfolio posted its first double-digit annual return.

The investment portfolio generated a gain of 10.7 per cent, compared with returns of 10.2 for the SAA benchmark and 0.8 per cent for the previous financial year.

The strong performance of equity markets, particularly US equities, was the main driver of the overall portfolio return.
Accordingly, the equity portfolios contributed the bulk of the total return.

Meanwhile, the fixed income portion posted a modest performance, adding approximately 3 per cent to total return.
Table 4 CONTRIBUTION TO ANNUAL RETURN FY 2011/2012 /PER CENT/ Percentage of Portfolio as at September 30 2012 Portfolio Weighted Return Benchmark Weighted Return COMPOSITE PORTFOLIO Cash 100.00 2.37* 10.73 0.00 10.18 0.00 FIXED INCOME: US Short Duration Fixed Income US Core Fixed Income EQUITY: US Core Domestic Equity Non US Core International Equity 23.46 38.13 18.82 17.22 0.38 2.64 5.07 2.28 0.32 2.04 4.97 2.53 *These deposits represent the cash contribution made by the Government on September 28, 2011.
**Portfolio and Benchmark returns may not sum to the Composite Return as they geometrically-linked.

pg 34 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 35 Investment Report Investment Report were chosen for the portfolio generated higher returns than the average return of the stocks in the benchmark.
On a regional level, stock selection in the Euro area and in Asia ex Japan made the greatest contribution to excess returns.

The Fixed Income portion of the Fund also posted positive returns over the financial year as US Treasury yields between the 2-year and 30-year segment of the curve declined.

While US Treasury securities gained modestly over the period, exposure to spread products proved beneficial for the sub-portfolios.
As at the end of September 2012, the net asset value of the two fixed income mandates totaled US$2,900.8 million, up from US$2,518.6 million one year earlier.

This increase in value reflected in part, the transfer of US$62 million of the government’s contribution to this mandate during the financial year.

The US Short Duration Fixed Income mandate returned 1.6 per cent, compared with 1.3 per cent for its benchmark, the Bank of America Merrill Lynch 1- 5 year US Treasury Index.
In the main, this outperformance came from the portfolio’s exposure to agency mortgages and foreign government securities whose spreads, relative to US Treasuries, tightened over the financial year.

The longer duration US Core Domestic Fixed Income portfolio generated a return of 6.7 per cent for the financial year, outperforming its benchmark, the Barclays Capital US Aggregate Bond Index, which gained 5.2 per cent.
The portfolio’s overweight exposure to the commercial mortgage backed securities and corporate bonds were the primary contributors to excess returns.

These two sectors of the Barclays Aggregate bond index were the best performers, posting gains of 11.7 per cent and 10.8 per cent, respectively.

The cash in the investment portfolio represented the contribution made by the Government on September 28, 2012, the end of the financial year.
This along with the cash balance held to meet the day-to-day expenses arising from the management of the Fund, amounted to US$113.9 million as at September 30, 2012.

Portfolio Risks The main risks for the HSF portfolio are Credit, Concentration, Interest rate, and Currency risks.

Below indicates how these risks are mitigated.


Credit Risk For the money market portion of the Fund, Credit risk is minimized by the strict adherence to the following standards: (i) all counterparties must have a minimum credit rating of either A-1 from the Standard and Poor’s rating agency or P-1 from Moody’s; and (ii) a maximum exposure limit for counterparties of no more than 5.0 per cent of the market value of the portfolio.
For fixed income instruments, credit risk is mitigated by the use of credit concentration limits as well as minimum credit quality ratings.

Bonds must have an implied investment grade rating as defined by Standard and Poor’s, Moody’s or Fitch.

Should the required ratings on an existing fixed income security fall below the minimum standards, the security must be sold within an agreed upon timeframe.
Over the financial year, the average credit quality was “AA+” and “AA- ” for the US Short Duration and US Core Fixed Income Portfolios, respectively.

Concentration Risk Concentration or Diversification Risk is minimised by investing across various asset types.

The portfolio is currently invested across four asset groupings as follows - US Short Duration Fixed Income, US Core Domestic Fixed Income, US Core Domestic Equity and Non-US Core International Equity.
The Asset classes in which the Fund invests react differently under a given market condition.

As such, it is likely that when one asset class has strong returns, another may The Equity holdings in the Fund registered solid gains over the financial year 2011/2012 as the uncertain environment was generally supportive to investors who were willing to take risk.
Both the US and Non-US equity portfolios generated double- digit returns in addition to outperforming their respective benchmarks over the financial year.

As at the end of September 2012, the net asset value of the equity holdings were US$1,697.6 million, compared with US$1,251.6 million one year earlier.

This increase in value reflected in part, the transfer of US$32 million to the equity portion of the Fund during the year.
The US Core Domestic Equity portfolio generated a robust return of 31.4 per cent, compared with a return of 30.7 per cent for its benchmark, the Russell 3000 ex Energy Index.

This outperformance was due to managers’ selection of stocks which gained more than those in the benchmark.

The greatest contribution to performance came from stock selection within the consumer discretionary, health care and information technology sectors.
The gains made on these selections more than compensated for the negative contribution from other stock selection decisions.

The other equity mandate which is comprised of Non-US International Equities returned 14.1 per cent over the financial year, compared with a gain of 13.6 per cent for its benchmark, the MSCI EAFE ex Energy Index.
This relatively better performance mainly reflected favourable security selection decisions, since those stocks which pg 36 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 37 Investment Report Investment Report have lower returns.
The Fund’s investments are also diversified across a number of assets with the aim of securing a positive return under a range of market conditions and to lower the total risk of the portfolio.

In addition, Concentration Risk is minimised within asset groups.

For the equity portfolios, this Risk is managed by imposing a maximum percentage holding of 3.0 per cent of any security’s outstanding shares, as well as a maximum sector deviation relative to the benchmark of 5.0 per cent.
Interest Rate Risk Interest Rate Risk is managed using a weighted average effective duration limit on the respective portfolios, with an allowable range of one (1) year longer or shorter than the weighted average duration of the respective benchmarks.

Table 5 shows the weighted average duration for the US Short Duration and US Core Domestic Fixed Income portfolios as at September 30, 2012.
Table 5 WEIGHTED AVERAGE DURATION /Years/ Mandate US Short Duration US Core Domestic Fixed Income Portfolio Benchmark 2.68 4.72 2.67 4.67 Currency Risk Currency risk is managed by containing and managing the exposure to non-US dollar instru- ments.

The Fund is invested in twelve currencies in addition to the US dollar.

These currencies include the Euro, Japanese Yen, Pound Sterling, Australian dollar, Swiss Franc dollar and Swedish Krona.
For the Fixed Income and US Core Domestic Equity mandates, no more than 10 per cent of the market value of the portfolio can be invested in securities which are denominated in currencies other than the US Dollar.

The Non-US Core International Equity Portfolio is comprised primarily of non-US dollar denominated securities, and the Fund accepts the currency risk inherent in the relevant benchmark.
For this mandate, currency hedging is permitted up to 15 per cent of the market value of the portfolio using the US dollar as the base currency.
Table 6 IMPLIED CURRENCY EXPOSURE CURRENCY US DOLLAR EURO CURRENCY POUND STERLING JAPANESE YEN SWISS FRANC AUSTRALIAN DOLLAR HONG KONG DOLLAR SWEDISH KRONA DANISH KRONE SINGAPORE DOLLAR NEW ZEALAND DOLLAR ISRAELI SHEKEL NORWEGIAN KRONE Per Cent 83.02 5.18 3.44 3.24 1.34 1.06 0.95 0.74 0.56 0.34 0.06 0.05 0.02 COMPOSITE TOTAL 100.00 Appendices Petrotrin Continuous Catalytic Regeneration Plant pg 40 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND • Annual Report 2012 pg 41 Appendices Appendices Appendix I Heritage and Stabilisation Fund Financial Year Portfolio Valuation Valuation Date /USD/ Net Asset Value Accumulated Surplus & Financial Year Income Unrealized Contributions September 30, 2007 1,766,200,701 42,217,837 41,966,361 321,706,043 Capital Gains/Losses Appendix II HSF Portfolio Historical Performance Since Inception Financial Year End Financial Year Return Annualised Return Since Inception Portfolio Benchmark % % Excess bps Portfolio Benchmark % % Excess bps September 2007* 2.97 2.95 1.89 5.48 5.44 September 2008 3.62 3.50 12.12 4.34 4.25 3.50 9.37 September 30, 2008 2,888,421,556 67,894,134 110,379,131 1,054,174,457 September 2009 2.80 3.18 -37.81 3.81 3.91 -10.01 September 30, 2009 2,964,686,478 35,807,757 186,755,766 - September 2010 6.07 5.75 31.93 4.61 4.59 2.29 September 30, 2010 3,621,984,041 88,381,935 364,361,226 477,344,263 September 2011 0.79 1.14 -34.89 3.80 3.87 -7.13 September 30, 2011 4,084,016,158 179,748,798
 374,074,067 451,400,519 September 30, 2012 4,712,376,278 125,221,977 794,770,772 207,550,846 September 2012 10.73 10.18 55.01 5.38 5.33 5.20 Note: * These returns are for the period March 2007 to September 2007.
1.

In May 2008, US Treasury instruments were added to the HSF portfolio.

As a result, the performance benchmark for the HSF portfolio became a blended benchmark which comprised of 2.5% Merrill Lynch US Treasury 1-5 Years Index and 97.5% US One-month LIBID Index.

2.

In August 2009, International Equities and Fixed Income Securities were added to the HSF portfolio.
The performance benchmark for the HSF portfolio became a blended benchmark which comprise, Bank of America/Merrill Lynch US Treasury 1-5 Years Index, US One-month LIBID Index, Barclays US Aggregate, Russell 3000 ex Energy, and MSCI EAFE ex Energy.

3.

In January 2011, the HSF Portfolio achieved its Strategic Asset Allocation where the portfolio was invested in four assets classes.

US Short Duration Fixed Income (25%), US Core Fixed Income (40%), US Equity (17.5%) and Non-US International Equity (17.5%).
Report of the Auditor General Trinmar Operations pg 44 pg 45 pg 46 pg 46 pg 47 pg 48 pg 49 pg 50 pg 51 pg 52 pg 53 pg 54 pg 55 pg 56 pg 57 pg 58 pg 59 pg 60 pg 61 pg 62 pg 63 pg 64 pg 65 Graphic Design: Design Workshop Photography: Apoesho Mutope Printing: Caribbean Print Technologies Ltd.
Photos Courtesy: BP Trinidad and Tobago Methanex Methanol Complany Lmited Trinidad Petroleum Company of Trinidad and Tobago Limited (“PETROTRIN”) BHP Billiton Trinidad and Tobago A PUBLICATION OF THE BOARD OF GOVERNORS OF THE TRINIDAD AND TOBAGO HERITAGE AND STABILISATION FUND Level 11, Ministry of Finance Building Eric Williams Financial Complex Port-of-Spain, Trinidad, West Indies Tel No: (868) 627-9700 ext 5129 Fax No: (868) 624-8886 www.finance.gov.tt E-mail: hsf@gov.tt