The Traded Policies Fund invests in Traded Life Policies (TLPs)
The Traded Policies Fund invests in Traded Life Policies (TLPs), an asset class which has delivered smooth, predictable investment returns independent of interest rates, equities and commodities. TLPs attracted increasing attention during recent financial turbulence because they stood out as an asset class that could deliver positive returns even as equities and bonds were going south.
TLPs, also known as Life Settlements, are United States issued life assurance policies where the policy owner has chosen to sell the future benefits of the policy so that they can enjoy some of the benefits in their own lifetimes. Unlike most asset classes, we have the unique benefit of knowing the amount that will be settled at a future date. Our experience enables us to estimate with reasonable accuracy the profit that will be made in advance of purchasing each policy. This profit is unaffected by market conditions, which is why TLPs are being considered more frequently as an alternative to bonds.
However, TLPs have attracted controversy, not least because as a relatively new form of investment they are still deeply misunderstood. So what should advisers know in order to differentiate the ‘good' from the ‘bad' funds that invest in TLPs?
Funds that invest in TLPs are buying assets at a deep discount from their fixed maturity values. The risk lies in the fact that it is impossible to know how long it will be before the policies mature, and therefore how many more premiums will have to be paid on them.
Given this risk, it is essential that TLP fund managers carry out correct actuarial analysis and portfolios are sufficiently diversified. The types of policies being bought are also an issue: it is better to buy policies held by more senior individuals with life expectancies averaging three years or less rather than policies from younger individuals for whom it is much more difficult to manage longevity risk.
Fund managers and other investors must bid to buy policies on the open market so TLPs are keenly priced. Therefore, advisers should look very closely at the charges in a fund because the only real way to gain alpha performance is by lower charges.
Performance fee caution
Initial charges on some TLP funds are as high as 10% and investors need to pay particular scrutiny to such products. But they should be particularly wary of products that impose performance fees.
Managers of TLP funds may value their units using a mark-to-market or a mark-to-model basis. The former values the funds based on what the underlying policies would fetch at any given time on the open market whereas the latter does so by giving each policy a present value based on the assumption that they will be held to maturity.
If the latter is applied then some degree of subjectivity is involved based on the actuarial model used. A performance fee creates a moral hazard as a fund manager can "skew" the fund valuations to create short term performance that is not justified. For this reason, advisers should shun funds that apply performance fees.
Advisers should look at fund track records to ascertain the performance/charges trade-off and to check that what might look like outperformance is not really down to the manager over-estimating the valuations of a fund.
Track records should also expose how good a fund manager is at managing currency risk. TLPs are dollar assets and if managers are to offer share classes in their fund in currencies other than dollars then they have to be able to hedge effectively. This is especially relevant with FX rates likely to remain volatile for some years to come.
Finally, investors should pay particular attention to the regulatory aspect of a TLP fund. Research presented at a recent roundtable debate sponsored by Managing Partners Limited revealed that five of the six product providers selling TLP funds into the UK were not using UK-regulated subsidiaries to do so.
The advantage of having a locally-regulated fund promoter is there is more accountability with regards to the marketing material. Clarity and transparency in the marketing material can only help advisers and their clients better understand this exciting asset class and the benefits it can bring - benefits which can only be delivered when TLPs are handled in the right way.
• Aims to provide steady capital growth
• 9% annual growth target net of all charges
• Not stock market related
• Cayman regulated mutual fund
• Cayman is a highly regulated and tax efficient territory
• Highly reputable and multi-disciplined investment house
• Financial Times listing
• Annual management fee of 1%
• May be included in personal portfolio bonds, wraps and SiPPs
• Telos rating of AA
Financial Promotion for Professional Advisors only. This material is not suitable for retail clients. Past performance is no guide to future performance and the value of investments and the income from them can fall as well as rise and you may get back less than you invested. Charges for funds may be higher than direct stock investments: further information is available on request. Investments in traded life policies can be more volatile than more established markets, and overseas investments can be subject to currency fluctuations. In the United Kingdom this fund is an Unregulated Collective Investment Scheme ("UCIS") and is therefore not regulated by the Financial Services Authority ("FSA"). It is distributed to Professional Advisors only by Managing Partners Capital Limited (FSA Firm Reference Number 471151), which is the Appointed Representative of Sturgeon Ventures LLP, which is authorised and regulated by the FSA.
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