Life settlements portfolio construction and asset management go hand in hand for a positive ROI. The big question is why are many new investors “going it alone”. Most importantly why are they not considering in their asset allocation strategy an already established fund?
With news filtering in regarding some struggling life settlements funds, we sit back and speculate on the future outlook of the asset class. Subsequently the potential effects on the secondary market with the reported increase in acquisitions in the tertiary market.
The historical volatility traditional markets, coupled with historically low-interest rates, suggest investors need to consider diversification into non-traditional asset classes. The life settlements asset class has real diversification capabilities. With the potential for growth and the attractive return 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. 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 a deep understanding of life insurance. Likewise, 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 revolve around neglecting one or more of these aspects.
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. Past performance does not necessarily 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 ROI 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 create a variety of long-lasting fund structure solutions should be capable of creating bespoke fund management solutions. 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, 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 the importance of having the skills to select the best policies. Additionally, we looked at the application of correct policy data in any calculation. Some investors make simplistic assumptions. They may view 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, the 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 policies for a greater return on investment in the short term. Holding the assets in a jurisdiction appropriate to your circumstances is also extremely important. Other managers are more conservative in their evaluations and the individual policies chosen on a policy by policy strategy. This ensures a steady return in the long term.
Making a comparison between 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 is negative or will do 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 in constructing a successful portfolio than just LE’s. Don’t make simplistic assumptions and find an experienced 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. They have 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.
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).
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.
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.