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24 August 2004 Angelo Coppola

(24.8.04) The segment that has recently lagged inflation (after-tax returns from the money-market funds) still dominates.

The segment with the best recent record – local equities – remains the poor relation.

The “perversity of recent numbers” has prompted STANLIB, to launch an education drive to alert risk-averse investors to capital-protected, equity-based alternatives to the money-market.

Says Sean Segar, head of Product Development at STANLIB: “The market correction in the year, leading up to Easter 2003, which saw about one third of the value of the JSE Securities exchange wiped out – scared off many equity investors.

The tide turned in the 12 months to Easter 2004 when some local equity funds recorded gains of 50%-plus. Yet the flight to money market ‘safety’ continued.

Figures from ACI (Association of Collective Investments), at the 31st March 2004, show that money market products account for 38(%) of the local collective investment scheme market or R85 billion in hard cash. 

Gross sales of the Money Market Funds in the first quarter of 2004 were 68% of total industry flows.

Domestic Equity-based products – once kings of the market – now account for just 27(%). “It’s a mismatch. The numbers look perverse, yet in a strange way it’s understandable,” says Segar.

He points to several factors keeping investors on the sidelines:

  • The feeling among some cash-focused investors that they missed the big equity upsurge and it’s no use chasing last year’s opportunity. Nervousness stemming from political factors like Iraq and the war on terror.
  • The surge in oil prices and memories of the slump during the last oil crisis in the late ‘70s.
  • Belief that interest rates will rise as oil-fired inflation sets in, creating improved yields in a safe haven like the money market.
  • Having been burned by volatile equities – “once bitten, twice shy”.

In previous market cycles this would keep any risk-conscious investor out the market. The difference is that in the last year a new generation of equity-based investments was introduced by wealth product developers like STANLIB.

“Over-commitment to the money market is a short-term, defensive strategy. After-tax the returns could be as low as 4%. By staying too long in defensive mode you could hurt your prospects of long-term capital growth.

This can be disastrous if you’re planning on a comfortable retirement in 10 or 20 years.

Health warning: remember to get the professional to advise you and your clients. This article should not construed to be advise.

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Healthcare brokers have long complained about inflation-plus medical scheme contribution increases; but pandemic may have changed things. What will pandemic-induced changes in hospital utilisation do to medical scheme contribution increase patterns?

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Below inflation increase for 2022, then back to inflation-plus
Long-term trend of below inflation increases
Inflation-linked hikes for 2022, then back to inflation-plus
This is a 2-year hiccup, inflation-plus increase trend remains in place
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