Get­ting per­for­mance right

Man­agers on tar­get de­spite the mar­ket

Finweek English Edition - - Communication & Technology -

TWO COM­PO­NENTS OF a med­i­cal aid fund have to op­er­ate ef­fi­ciently for it to work prop­erly and pro­vide suf­fi­cient ben­e­fits for mem­bers. The med­i­cal scheme must be ad­e­quately funded and it must grow, prefer­ably at a higher rate than inflation and med­i­cal inflation.

Get­ting that right de­pends largely on the in­vest­ment man­agers who look af­ter the fund. It’s not an easy job. As­set man­agers run­ning med­i­cal scheme funds are bound by the re­stric­tions of Reg­u­la­tion 30 of South Africa’s Med­i­cal Schemes Act. That im­poses sen­si­ble – but none­the­less re­stric­tive – lim­i­ta­tions on what the as­set man­ager can in­vest in: for ex­am­ple, set­ting a limit on the per­cent­age of eq­ui­ties that can be used in a port­fo­lio.

The lat­est Alexan­der Forbes As­set Con­sul­tants’ Med­i­cal Aid Man­ager Watch Sur­vey shows, not sur­pris­ingly, that funds have taken a bit of a knock over the past year, ex­cept in the money mar­ket fund cat­e­gory. How­ever, over three years the ben­e­fit of hav­ing eq­ui­ties in a med­i­cal scheme port­fo­lio be­comes clear. It’s the long-term view that’s im­por­tant. Med­i­cal schemes are long-term plans for the ben­e­fit of mem­bers.

Par­tic­i­pat­ing funds in the Alexan­der Forbes As­set Con­sul­tants’ sur­vey fall into three cat­e­gories: ab­so­lute re­turn funds, money mar­ket funds and bal­anced funds. Most set dif­fer­ent bench­marks, so ab­so­lute per­for­mance isn’t the ba­sis for the rank­ing of the funds.

Head­ing the ab­so­lute re­turn cat­e­gory is the Cadiz Cap­i­tal Preser­va­tion Fund. It sets a bench­mark of head­line CPI plus 3% and over one year has a re­turn of 9,33% against the bench­mark’s 16,43%. That may seem way off the bench­mark, but the lat­ter part of the year co­in­cides with one of the most tur­bu­lent times we’ve seen in the SA eq­ui­ties mar­ket in a long time.

Over three years the fund has gained 11%/ year com­pared with the bench­mark’s 11,43%. That’s about on tar­get. The slight short­fall would also be the re­sult of re­cent con­di­tions on the JSE.

The Taquanta Med­i­cal Cash fund heads the money mar­ket funds sec­tion. Those funds lead over one year, also a re­flec­tion of the volatile eq­ui­ties mar­ket and the de­cent re­turns high in­ter­est rates are af­ford­ing cash as an in­vest­ment. The Taquanta fund gained 12,1% over the year against the bench­mark (the Short­term Fixed In­ter­est – STeFI) 10,94%. Over three years the re­turn is a more hum­ble 9,67%, though it’s com­fort­ably ahead of the bench­mark’s 8,87%.

The Al­lan Gray Life Sta­ble Med­i­cal Port­fo­lio heads the bal­anced fund sec­tion. That fund also sets a bench­mark of head­line CPI plus 3% and has a re­turn of 9,02% for the year, a lit­tle lower than the Cadiz ab­so­lute re­turn fund. But over three years the bal­anced fund shows its met­tle, with a re­turn of 15,6%/year. That’s sig­nif­i­cantly ahead of the bench­mark’s 11,43% and of the per­for­mance of the Cadiz fund. But an ab­so­lute re­turn fund shouldn’t be try­ing to out­per­form its bench­mark, so the Cadiz fund is do­ing its job pretty well.

How­ever, the bal­anced fund ver­sus the ab­so­lute re­turn fund’s per­for­mance sup­ports a view I’ve long held – that bal­anced funds can do the job of an ab­so­lute re­turn fund but with more po­ten­tial on the up­side. And most of­ten at a lower cost.

Im­por­tantly, all the top ranked funds have com­fort­ably out­per­formed med­i­cal con­sumer price inflation of 6,56% over one year and 6,06% over three years.

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