With news filtering in regarding some struggling life settlements funds and followed by reports of successful acquisition of existing portfolios in the tertiary market we sit back and speculate on the future outlook of the asset class and the potential effects on the secondary market.
The big question is why are many new investors “going it alone” and not considering in their asset allocation strategy an already established fund or using the services of an established manager in the asset class?
The historical volatility of the equity and real estate markets in particular, but also the well-publicised failures in both fixed interest and derivative based hedge funds, coupled with historically low interest rates, suggest investors more than ever need to consider diversification into non-traditional asset classes. The life settlements asset class has real diversification capabilities with an attractive return which has seen an increase in activity for the asset.
Like every other asset class Life Settlements have been troubled by at times the outright poor management of client funds as well as a percentage of industry players on the wrong side of the law. These of course always make the headlines and we have all experienced the phenomenon of a press environment that gives preference to a negative story rather than a positive one.
To some extent the industry has brought this upon itself.
Is there anything good to say about life settlements funds and their managers? Yes, absolutely. Successful managers have been able to carve a name in the industry for themselves reflecting their ability to develop a successful strategy that balances risk and return, sound portfolio construction, and ongoing asset management.
Investing in Life Settlements is quite bluntly not as simple as buying the asset, putting it in the bottom drawer of a filing cabinet and sitting back to wait for your windfall profits. In fact, it requires both a deep understanding of life insurance and a disciplined fund management approach to acquisition and asset selection. In the asset selection process alone there is both a need in equal measure, for quantitative analysis as well as insightful asset due diligence. Most operational problems managers have experienced to date revolve around neglecting one or more of these aspects or the resultant treasury management issues when cash flow timing is miss-estimated.
So what can be done to ensure you are investing in a successful fund and a capable fund manager?
This is the primary method of selecting many investment funds and asset managers. However, this is ultimately not the best way to evaluate a life settlements fund as past performance does not necessary dictate the future outlook of the fund. Managers in many cases may use a conservative fund strategy resulting in a modest return in initial years to ensure future stable return on investment in the future. In fact, the best predictor of future performance is the quality of the investment process which enabled the investment manager to perform in the first place. If this process is robust and consistent, it is safe to say that you can have more comfort that the manager you choose is likely to continue to perform.
Different investors have different needs as regards risk appetite, time horizon and amount of money available to invest. This may determine if the solution is a co-mingled fund or a separately managed mandate.
A manager who is able to successfully negotiate the market and create a variety of long lasting fund structure solutions should be capable of creating bespoke fund management solutions for your specific needs. Do not be content with a “one product fits all investors” approach by any potential manager. However, “In-house” management of a life settlements investment also involves a very different professional profile and a unique set of skills to maximise opportunities and avoid potential pitfalls. “In-house” management by non-life settlement professionals of a new venture into the life settlement market although deceptively cheaper in day to day running costs, typically fails due to unforeseen management issues.
Therefore, beware of saving pennies in the battle to save on management costs only to lose the war by poor asset selection.
Could it be the policies in the portfolio?
In our previous posts we have discussed briefly about the importance of having the skills to select the best policies and the source and application of correct policy data in any calculation. Some investors make simplistic assumptions in that all policies in the market with the stated characteristics (Age, Gender, Smoking Status, LE, Policy Type,) will have the same average premiums and (in some cases therefore) the same Assumed Purchase price. This is simply not the case. Some skilled asset managers in the industry are careful to assess each policy’s individual merit to ensure a successful strategy. Portfolio construction in the life settlements asset class proves that it’s the little details that affect the overall performance.
A recent empirical study by Januario A V & Naik N Y (Empirical investigation of life settlements: The secondary market for life insurance policies 2013) suggests that “the primary determinant of returns across life settlement contracts is not adverse selection relative to underlying life expectancy, but other economic phenomena such as cost-benefit trade off, bequest motive, convexity of premiums, diversification of unique risks and mitigation of life expectancy estimation risk.”
This is something we would like to delve in a little bit further in the next post. Look into
Choosing the right type of fund
Choosing the right type of fund for you is as important as choosing the right manager. Some funds are aggressive in policy selection choosing riskier polices for a greater return on investment in the short term. Some are structured in jurisdictions that invite other international issues such as regulatory or tax complications. Holding the assets in a jurisdiction appropriate to your circumstances is therefore also extremely important. Other managers are more conservative in their evaluations and the individual policies chosen on a policy by policy strategy, ensures a steady return in the long term. Making a comparison between of funds is extremely difficult. Accordingly, an investor (or Manager) should be careful to assess each policies’ individual merits and not on a generic portfolio basis. Many portfolios have been purchased on the tertiary market by investors at apparently bargain basement rates only to find that large sections of the assets are worthless and that IRR are negative or will go so in a very short space of time.
So that is it. That’s the secret to the success behind investing in the life settlements asset class.
- Be prepared to find another process to evaluate fund performance
- Although it appears to be a simple asset class there is a lot more involved to constructing a successful portfolio than just LE’s. Don’t make simplistic assumptions and find an experience fund manager willing to direct you in the right direction.
- Different managers use different evaluation processes. It’s difficult to make exact comparisons between policies let alone entire portfolios.
- When constructing your own portfolio and evaluating funds keep your ultimate goal in mind. Ensure your goal matches the strategy of the fund/portfolio.
- Whatever the strategy of the fund you must select the one that suits your ultimate goals. Many an investor, new to the game, has unwittingly taken on risks disproportionate to their appetite or missed value opportunities, through simple lack of knowledge.
- It can take years of progress to develop accurate management techniques so it is essential that the fund manager has been operational long enough to have learned how to develop the optimum strategy for you.
- Be patient. Cash flow in the early years of a new portfolio should rightly be expected to be small. The real returns come from holding to maturity. Life settlement policies have never been a trading asset.
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.