The current stock market instability, witnessed in China, has hit investor confidence hard. Further, some analysts are warning that the region should expect more volatility.[1]
What happens if China and its surrounding neighbours remain the epicentre of the current stock market instability? One thing is certain, investors need to focus their asset allocation toward adding some truly diversifying investments.
We have attended events in the past where colleagues have eagerly focused discussion toward allocating investment to truly alternative asset classes. Certainly, assets need to be truly uncorrelated to traditional market risks like volatility and inflation. Furthermore, they need to also contribute toward stable long term performance. Finding truly alternative investments can appear rather daunting. Alas, there is an asset class which exists to fulfil these objectives.
Planning for Stock Market Instability with Life Settlements
When planning for strategic asset allocation, an investment in a portfolio of secondary life insurance policies can prove to be a powerful tool. Certainly, this is more important during periods of severe and prolonged market volatility. It allows you to diversify your investment portfolio into an alternative asset class where the underlying assets are not correlated to events in the stock, bond or property markets. Hence, this helps reduce the volatility in your investment, whilst maintaining the potential for a strong return. How this is achieved is outlined below;
- An asset class with real diversification. Studies have been unable to detect any correlation between human longevity and the cycles of financial markets.
- Displays low volatility. The intrinsic characteristics of Insurance Securities such as Life Settlements, being non-identical, non-market traded physical securities means that they are by nature significantly less volatile than say listed securities. Couple this with the earlier mentioned characteristics of longevity instruments this results in a further reduction in volatility.
- An attractive return portfolio. The above characteristics result in attractive risk-adjusted returns being achieved.
- Quality of the underlying asset. Like any investment, you want to be sure you get paid in due course. Insurance securities like US Life Settlements boast underlying credit quality higher than most bank-issued bonds.
- Offers a known future cash flow. It is not a matter of IF you will see the money but simply WHEN. The uncertainty is in the term of the investment. Therefore, this is one of the return premium drivers demanded on these very low credit risk instruments.
- The regulatory environment is robust. The regulation of the US life insurance secondary market now exists in forty-five of the fifty states
- Most current fund structures are domiciled in recognise and robust regulatory environments. Regulated Asset Managers are aware that investors justifiably want good governance and transparency.
- LE calculations continue to develop. The life expectancy calculation regime has evolved since the early days of the asset class to more accurately account for the Life Settlements specific cohort of insured lives. These are distinct from the general insured population and indeed the general population tables. Underwriting now also accounts for anti-selections bias.
Conclusion
To all budding life settlements investors, we give you this one counsel. In this market, funds operate within different regulatory regimes, utilise different investment strategies, different valuation methodologies, and operate with varying levels of transparency which makes significant analysis across funds difficult. Ensure that the asset manager you choose can adequately meet your objectives.
We have focused on many topics in the past including;
Doing a little homework, in this ever-evolving asset class, can go a long way towards a successful investment long into the future and provide secure performance uncorrelated to traditional markets. We simply need to embrace the characteristics of this investment class (Lack of Correlation, Risk/Reward proposition to name a few). Finally, with experience, it can be managed to succeed.
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. Additionally, if you want to the performance cycles in life settlements we would be happy to discuss.
About Global Insurance Settlements Funds PLC (GISF)
Global Insurance Settlements Funds PLC (GISF) is an umbrella type investment company with segregated liability between sub-funds. The fund is incorporated in Ireland. The first sub-fund launched, GIS General Fund (the Fund), is listed on the Irish Stock Exchange.
This structure is aimed at Sophisticated / Institutional investors. Additionally, it provides tax clarity by ensuring there is no tax leakage. It enables a number of different investment options to suit the specific needs of our investors.
The Fund’s core activity is to actively manage a large and diverse portfolio of life insurance policies (life settlements). The Board of GISF selects those that best meet the Fund’s policy purchase criteria.
Disclaimer
This information is intended for qualifying investors only. It 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.
References
[1] The Guardian, ” Stock Markets Continue to be Volatile as Investors Fear China Risk”, 26th August 2015, [ONLINE] Available at http://www.theguardian.com/business/2015/aug/26/stock-markets-continue-to-be-volatile-as-investors-fear-china-risk, [Accessed 27 August 2015].
