Just under 6 years ago, ASISA (Association of Savings and Investments in South Africa) launched what should have been a really exciting education savings initiative called Fundisa. The idea was to provide a unit trust alternate to the traditional insurance based products. In addition, government was offering a 25% bonus contribution to all investors. On the face of it, Fundisa ticked all the right boxes: flexible, transferable, low cost, low minimum investment and best of all, an additional bonus paid into the investment by government.
Initially huge fans, we encouraged many people to take advantage of what seemed like a great offer…until we did the maths and discovered that Fundisa was fatally flawed for at least 2 reasons. The fund invests in “cash” and the bonus is capped on too low an amount!
In brief, Fundisa works as follows: subject to a maximum contribution of R200pm, government adds 25% to the investment. So for every R200 that is invested by the investor, a bonus of R50 is contributed by government. Following some basic maths, I calculated that the projected return using Fundisa would look something like this (assuming R200 from me + R50 from government and a 7%* per annum return – this also assumes no escalation on the contribution because the bonus is capped on the first R200).
|
Year |
Fundisa projected value |
|
1 |
R 3 098 |
|
2 |
R 6 420 |
|
3 |
R 9 983 |
|
4 |
R 13 802 |
|
5 |
R 17 898 |
|
6 |
R 22 290 |
|
7 |
R 27 000 |
|
8 |
R 32 050 |
|
9 |
R 37 465 |
|
10 |
R 43 271 |
|
11 |
R 49 497 |
|
12 |
R 56 174 |
|
13 |
R 63 333 |
|
14 |
R 71 009 |
|
15 |
R 79 241 |
|
16 |
R 88 067 |
|
17 |
R 97 532 |
|
18 |
R 107 680 |
|
19 |
R 118 563 |
|
20 |
R 130 232 |
At the end of the term, the full amount is payable to an approved tertiary educational institution. The investor also has the option of taking the funds in cash and using them for anything else but they would then forfeit the bonus contribution and any growth on it (i.e. they would get around 25% less than the projected amounts).
In some other work we have recently done, we calculated that the cost of a 3 year degree in 2023 (assuming an increase of 10% pa) would be around R460000 and you would need to be saving around R1700 pm to achieve this# – clearly the R250 pm is not anywhere near enough to fund tertiary education at a university and investors need to be alerted to the fact that they are unlikely to be able to afford to pay for their studies using this fund alone. As far as we can see, there is no “disclosure” of this fact anywhere on the website. (As a matter of interest, the comparative projected cost of a 3 year degree in 2033 is more than R1.2m.)
My second and perhaps more serious criticism of Fundisa is that it is too conservative in its investment approach. You cannot sit in “cash” for 20 years and expect a half decent return! So we compared two alternate scenarios to Fundisa using more appropriate investment portfolios: we compared R250 into Fundisa versus R200 into a typical “balanced” fund and R200 into a typical equity fund **.
The return assumption on the balanced fund was 11%pa (CPI+5%) and the equity fund was 14% (CPI+8%). The results are as follows:
|
Year |
Fundisa |
Balanced Fund |
Equity Fund |
|
1 |
R 3 098 |
R 2 525 |
R 2 560 |
|
2 |
R 6 420 |
R 5 342 |
R 5 503 |
|
3 |
R 9 983 |
R 8 485 |
R 8 885 |
|
4 |
R 13 802 |
R 11 991 |
R 12 772 |
|
5 |
R 17 898 |
R 15 904 |
R 17 239 |
|
6 |
R 22 290 |
R 20 269 |
R 22 374 |
|
7 |
R 27 000 |
R 25 139 |
R 28 275 |
|
8 |
R 32 050 |
R 30 573 |
R 35 058 |
|
9 |
R 37 465 |
R 36 635 |
R 42 854 |
|
10 |
R 43 271 |
R 43 400 |
R 51 814 |
|
11 |
R 49 497 |
R 50 947 |
R 62 112 |
|
12 |
R 56 174 |
R 59 367 |
R 73 948 |
|
13 |
R 63 333 |
R 68 761 |
R 87 552 |
|
14 |
R 71 009 |
R 79 243 |
R 103 187 |
|
15 |
R 79 241 |
R 90 938 |
R 121 157 |
|
16 |
R 88 067 |
R 103 986 |
R 141 811 |
|
17 |
R 97 532 |
R 118 544 |
R 165 550 |
|
18 |
R 107 680 |
R 134 786 |
R 192 833 |
|
19 |
R 118 563 |
R 152 908 |
R 224 192 |
|
20 |
R 130 232 |
R 173 128 |
R 260 233 |
Using the return assumptions above, it should be clear to see that after 10 years in a balanced fund and just 6 years in an equity fund you would be better off than in Fundisa – even without the 25% government bonus!
But this is all just theory, what has actually happened? To look at this we compared the “average” fund in each of the relevant sectors and used the relevant historic returns to calculate the projected values of each:
|
Historic returns 10 years to 31 March 2013 |
||
| Fund |
Sector |
Ave return |
| Fundisa | SA IB Short Term |
8.58% |
| Ave Balanced | SA MA High Equity |
16.78% |
| Ave Equity | SA EQ General |
20.92% |
Based on these assumptions we get the following results:
|
|
“Fundisa” |
“Balanced” |
“Equity” |
|
1 |
R 3 121 |
R 2 593 |
R 2 644 |
|
2 |
R 6 707 |
R 5 813 |
R 6 056 |
|
3 |
R 10 813 |
R 9 781 |
R 10 423 |
|
4 |
R 15 495 |
R 14 643 |
R 15 974 |
|
5 |
R 20 818 |
R 20 573 |
R 22 993 |
|
6 |
R 26 852 |
R 27 774 |
R 31 831 |
|
7 |
R 33 676 |
R 36 488 |
R 42 918 |
|
8 |
R 41 374 |
R 47 004 |
R 56 785 |
|
9 |
R 50 041 |
R 59 661 |
R 74 086 |
|
10 |
R 59 780 |
R 74 861 |
R 95 628 |
Based on the above you would have been better off after just 6 years in an average balanced fund and 4 years in an average equity fund. The overwhelming conclusion is that for the first 5-10 years, Fundisa could be a half decent prospect but after that is gets left behind and is too conservative for anyone wanting to save for any period longer than this.
At the time of investigating all of this we also wrote to ASISA to suggest some alternate fund options and their response was probably the most disturbing thing of the whole exercise:
“While the approach suggested…is correct for the majority of investors, the Fundisa Fund was structured as a low risk investment vehicle for a very good reason: it primarily targets low income earners who, as a result of their financial situation, cannot afford to take any risk with their money.” Their response continued…“also, the majority of low income earners are not serviced by financial planners who can assess their risk profile and structure and maintain a savings and investment portfolio accordingly. This is another reason why Fundisa had to be designed as a low risk product.”
Seems to me that even the learned chaps at ASISA don’t really understand “risk” – volatility is just one measure and needs to be considered alongside (many) other factors including inflation. To label Fundisa a “low risk” investment is to take a very narrow view of risk! If one uses inflation as a measure of risk then Fundisa could in fact be considered a high risk investment. Perhaps it should be more correctly labelled a “low volatility, low growth” investment?
And finally “therefore, while Fundisa will provide investors with solid inflation beating returns, it will always return less over the longer-term than an equity fund…historically, Fundisa has delivered a marginally higher return than a money market fund.”
Contrary to this, the long term real returns from the respective asset classes suggests that there is very little probability of cash and bonds ever providing “solid inflation beating returns”. To my mind, if we follow this reasoning then rather than educating and uplifting society we are condemning the poor to a life of poverty. To suggest that “they” don’t understand and are therefore restricted to an inferior option is patronising in the extreme and any product that is not good enough for “us” is not good enough for “them” either.
My advice is to stay away from Fundisa!
Notes:
*7% is a reasonable return expectation from this kind of fund in the current interest rate environment. The return for 12months to 31 March 2013 was 6.09% from the Stanlib option and 7.55% from the Nedgroup fund.
#this assumes a return of CPI+5% over the term as well as annual increases of 6% (CPI) on the premium.
** R200 because there would be no bonus if you did not use the Fundisa fund.
