Combining liquidity and above-inflation growth
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