Vi­tal in­jec­tion

Com­bin­ing liq­uid­ity and above-in­fla­tion growth

Finweek English Edition - - Creating Wealth - SHAUN HAR­RIS

FUND­ING IS VI­TAL for med­i­cal aid schemes. So is cap­i­tal preser­va­tion. They need to care­fully man­age funds un­der man­age­ment, aiming to make mem­bers’ con­tri­bu­tions grow at a greater rate than in­fla­tion and also make sure there’s al­ways enough liq­uid as­sets to meet any un­ex­pected in­crease in claims.

For that rea­son med­i­cal aid funds’ port­fo­lios tend to be very con­ser­va­tive, in­vested largely in fixed in­ter­est – largely money mar­ket funds – as­sets. Per­haps too con­ser­va­tive to en­sure suf­fi­cient growth in pre­mi­ums to meet mem­bers’ fu­ture claims.

It’s there­fore en­cour­ag­ing to learn about as­set man­ager Al­lan Gray’s Stable Med­i­cal Port­fo­lio, a fund launched four years ago for med­i­cal schemes to take ad­van­tage of the Med­i­cal Schemes Act, which al­lows schemes to in­vest up to 40% of as­sets in eq­ui­ties. dis­cern­ing about which eq­ui­ties you put into the fund.”

Latest unit trust per­for­mance fig­ures (see at back of Fin­week) show the Al­lan Gray Stable unit trust is one of only four funds in the pru­den­tial low eq­uity sec­tor to pro­vide a pos­i­tive re­turn over the past three dif­fi­cult months on the stock mar­ket.

There are two bench­marks in­vest­ing med­i­cal schemes can choose from in the Stable Med­i­cal Port­fo­lio: the three-month cash de­posit in­dex plus 2% or CPI plus 3% (see ta­ble).

Du Toit says the ex­cep­tional out­per­for­mance of the fund over its bench­marks has been due to the phe­nom­e­nal re­turns from JSElisted shares over the pe­riod. “This sig­nif­i­cant re­turn above the bench­mark is cer­tainly not sus­tain­able over the long term and we ex­pect the port­fo­lio to de­liver re­turns closer to its bench­mark over time.

“Based on the very long-term re­la­tion­ships be­tween in­fla­tion and as­set class re­turns a port­fo­lio such as this – with an eq­uity ex­po­sure in the re­gion of 30% – would have re­turned around 3% above in­fla­tion over the long term.”

Du Toit says med­i­cal schemes are dif­fer­ent or­der to grow their as­sets in real terms and at the same time com­ply with the reg­u­la­tions of the Act,” Du Toit says.

The fund is a bal­anced port­fo­lio, in line with Al­lan Gray’s bot­tom-up fun­da­men­tal in­vest­ment phi­los­o­phy and process. It’s an ac­tively man­aged fund sim­i­lar to the Al­lan Gray Stable unit trust, in the pru­den­tial low eq­uity sec­tor, says COO Greg Fury. “Funds in that sec­tor should pro­tect cap­i­tal – but not all do that ad­e­quately. You must be very from tra­di­tional pen­sion funds, in that they need ac­cess to their cap­i­tal at very short no­tice to meet claim pay­ments from their mem­bers. “That’s one of the rea­sons why schemes can in­vest only 40% in eq­ui­ties. Given the short-term volatil­ity that eq­ui­ties ex­pe­ri­ence, schemes can’t run the risk that a large por­tion of their as­sets may ex­pe­ri­ence neg­a­tive re­turns just as they need to with­draw cap­i­tal.”

There­fore, eq­uity se­lec­tion and as­set al­lo­ca­tion are paramount. Fury notes the ad­di­tion of eq­ui­ties in the fund doesn’t make much dif­fer­ence to its risk profile. The largest monthly de­cline for the port­fo­lio was 2% in June this year, when the mar­ket (as mea­sured by the all-share in­dex) fell 4,4%.

Due to the ex­cep­tional re­turns by SA shares over the past four years, Du Toit says the port­fo­lio’s eq­uity ex­po­sure has been re­duced. “Cur­rently, the port­fo­lio has 22,3% net eq­uity ex­po­sure, well be­low the max­i­mum al­low­able 40%. The shares we find at­trac­tive in­clude MTN, Rem­gro, Richemont and SABMiller – all large, high qual­ity com­pa­nies with glob­ally di­ver­si­fied busi­nesses and less cycli­cal de­mand pat­terns for their prod­ucts. We be­lieve they’ll be able to grow their earn­ings faster than in­fla­tion over time.”

Other as­sets in the fund in­clude a 15% ex­po­sure to hedged eq­ui­ties that Du Toit says uses all-share 40 fu­tures con­tracts to elim­i­nate ex­po­sure to the stock mar­ket in favour of a cash-like re­turn, while still be­ing ex­posed to any out­per­for­mance in his se­lec­tion of shares. Fixed in­ter­est as­sets, mak­ing up 56,2% of the port­fo­lio, are in­vested in short du­ra­tion money mar­ket in­stru­ments. There’s also a 2% ex­po­sure to listed prop­erty.

“We’re cer­tainly happy with the per­for­mance of the port­fo­lio since its in­cep­tion – but again cau­tion in­vestors not to ex­pect the re­turns of the past four years to be re­peated. We be­lieve that by con­sis­tently ap­ply­ing our in­vest­ment phi­los­o­phy the port­fo­lio will pro­vide an at­trac­tive op­por­tu­nity for schemes to ben­e­fit from the up­side in eq­uity mar­kets while still meet­ing their shorter-term cap­i­tal pro­tec­tion needs.”

Bet­ter ex­po­sure. Chris du Toit

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