Do the benefits of a self-managed portfolio truly outweigh the complexities faced in life settlements market? Asset managers play a crucial role in the continual development and success of this unique asset class. Managers, who have successfully navigated the complexities of this market, manage efficient funds providing attractive uncorrelated returns for many investors.
So why is it that some major institutions attempt to manage their life settlements investment in-house?
The option of cutting out the “middle man” and opting to manage the portfolio in-house can actually, whilst being initially attractive, place enormous strain on your potential success. You may be faced with costly mistakes or lost opportunities which could have been avoided with the right life settlements asset manager.
In a previous blog we have explored how to assess the best life settlements asset manager and ensure that they are the best fit for your life settlements investment strategy. We have previously also explored how the effect on your returns will clearly come down to regulatory and taxation impacts. Let’s continue our analysis by exploring the benefits and limitation of in-house management for a life settlements investment.
Benefits and Limitations of a Self-Managed Portfolio
In-house management of a life settlements investment involves a very different risk profile and needs careful consideration. Although in-house management may have its opportunities it also has its pitfalls. Successful in-house life settlements management will require a symmetry of experienced people, processes, systems and overall resources at the usual disposal of a regulated life settlements manager. In many cases this could be difficult to achieve for many small to medium institutions. We have even seen examples of quite large and well-resourced institutions making basic mistakes in the asset class through poor acquisition and management skills.
Experience in the managing the Asset Class
In-house management of a life settlement investment may be appropriate for some institutions, for example ones with previous exposure to investing in this asset class. However, most are unlikely to have the scale or expertise to effectively undertake in-house asset management of their life settlement portfolio. Previous experience in life settlements management is an indicator of success and depending on the level it will be the key player in your investment returns. Inexperienced managers invariably make mistakes in managing this asset. Often these mistakes have been well documented in other funds.
Operational Set up Costs
For many institutional investors, moving life settlements investments in-house requires a complete overhaul of many of the existing processes. It is more difficult than just hiring personnel, it requires the assembling of significant internal resources whilst committing them to a specialized and unique investment goal to ensure the success of the strategy. Life settlements are a labour intensive asset where failure to regularly execute the necessary processes and risk management can result in total loss of individual assets.
Allocation of Time
You will have to allocate FAR MORE TIME to the management of your life settlements portfolio than you anticipate. It isn’t a matter of just purchasing the policies and waiting for them to mature. Policies require regular premium optimization and liaison with the carrier to ensure the policy remains in force. Premium optimization is an art that requires informed choices being made in relation to different case characteristics.
The outside manager often employs investment strategies that are simply not available to most in-house managers. Hiring an external life settlements manager may allow you to broaden your investment guidelines beyond the comfort level you would have had you’re your in-house management. Investment professionals benefit from economies of scale not always available to part-time managers. The outside manager’s volume of business can lead to strategic efficiencies, access to market information, and investment opportunities not always available to smaller investors.
Leadership is essential
The most successful life settlements funds have hands-on leaders involved in every level of operational detail. Strong leaders act as “team captain” for this complex work, solving problems and engendering respect and confidence in staff, investors and regulators. In many institutions there are no personnel available who have in-depth knowledge of the asset class to be able to gain the confidence of upper level management.
Level of Accountability
The level of accountability in meeting investment goals and conforming to guidelines is often greater with an outside manager than realistically can be imposed on a staff member, especially if this is one of many of that person’s responsibilities.
The construction of a life settlements portfolio requires its own unique expertise, management and tracking systems. The portfolio also must be of a sufficient size and stability to allow the in-house manager to reasonably add value. Working with an existing and regulated life settlements manager may prove to be more of an advantage due to its potential to introduce a range of strategies that are ranked appropriately on a risk/reward basis.
Due Diligence Pre and Post Acquisition
It is critical that extensive due diligence on portfolio packages are performed to outline any potential risks associated with certain policies. Poor due diligence on policy acquisition will reduce overall return either through litigation costs or inability to maximise price in the event of re-sale.
Risk Appetite and Mitigation
The mitigation of risks is performed by an experienced fund manager with substantial experience in portfolio construction techniques applied to manage the risk/return profile at a portfolio wide perspective. Many investors (and some so called managers) have unwittingly taken on additional risks and missed substantial value opportunities to those normally associated with a longevity based investment such as life settlement policies, through a failure to grasp these issues.
The ultimate test you should consider when attempting to manage your life settlements is , has your internal or external manager been subject to review by an internationally recognised asset consultant in managing life settlements? If the answer is “No”, and you are considering a substantial play in this asset, then you should reconsider your implementation strategy.
Many institutions have strategic investment goals which may not align with that of a managed fund from a big, well-known fund manager. Instead, view in-house management as a useful mechanism to ensure there is sync between objectives and investment strategies.
No one wants to bundle together a series of external mandates in an effort to suite. Investors are searching for tailor made portfolios to suit their needs.
A simple alternative to this issue may be selecting a boutiques manager which have specialist focus in life settlements who have the flexibility to structure an investment suitable to your risk appetite and strategy.
Our Group has been successfully managing the asset class since 2006, and have acquired approx. 2.5B in face value that has been acquired for different varying structures designed to meet particular investor needs. These structures have also provided a high level of corporate governance and accountability for their clients. We are also on the Mercer, Global Investment Manager Database.
Perhaps the most notable reason for moving life settlements assets in-house is due to the desire to maximize net-of-fee investment returns.
For many institutional investors the set-up and operational costs of moving the management of a life settlements portfolio in-house may seem more desirable to ensure adequate alignment with their investment objectives.
However, the industry is littered with examples where saving a small amount of costs up front have only resulted in large negative capital and trading results from poor asset selection and poor execution of ongoing management.
The advantages of managing life settlements assets in-house might not be suitable for many investors as it requires an overhaul of many procedures to ensure efficiency.
Each company’s situation is unique and catering for in-house management of your life settlements portfolio will have its challenges. As with any business decision, weigh the pros and cons objectively. Understand how a manager adds value, set realistic goals and expectations, and avoid short-run solutions that aren’t just focused on cost reduction
As always we wish you well with your life settlement investment opportunities and if you want to learn more about investing in this asset class please contact us.
Disclaimer: This information is intended for qualifying investors only and was correct at the time of preparation. It has been prepared to provide general information only and should not be considered as a “securities recommendation” or an “invitation to invest” in any jurisdiction. Potential investors should consider the relevance of this information to their particular circumstances. Before proceeding investors must obtain the prospectus and take their own legal and taxation advice. If you acquire or hold one of our products we will receive fees and other benefits as disclosed in the prospectus and relevant offering documents.