By using actuarial calculations of mortality, and focusing buying activity on select policies being sold to the secondary market by the over 65s, it has been possible to deliver stable returns with low risk.
While well known among institutional investors, their performance credentials are strengthening the argument for inclusion among retail portfolios, particularly for those looking to add uncorrelated asset diversification to core holdings of equities and bonds.
According to Financial Express data, some of the best performing with profits funds struggled to return more than 20 per cent over the past three years to 23 October.
Top 5 performing with profits life funds
| Rank | Fund | Group | Focus | Bid | Offer | 3-yr % |
|---|---|---|---|---|---|---|
| 1 | Windsor Aegon With Profits | Windsor Life | With Profits | 269.68 | 285.38 | 16.3 |
| 2 | Scottish Friendly Optima ISA With Profits | Scottish Friendly Assurance | With Profits | 151.50 | 151.50 | 13.6 |
| 3 | Phoenix Alba Crusader With Profit Performance | Phoenix Life | With Profits | 322.10 | 339.10 | 12.2 |
| 4 | Windsor Origins Unitised With Profits | Windsor Life | With Profits | 192.26 | 192.26 | 12.0 |
| 5 | Cler Med With Profit (Singular) Acc | Clerical Medical Invest | Mixed Asset | 591.40 | 622.60 | 11.5 |
Source: Trustnet.com
Compare that a product such as the Guernsey based EEA Fund Management Life Settlements Fund, which just reported its 45th consecutive month of positive returns through September. The annualised return for the sterling accumulation share class has been 10.18 per cent since inception, according to EEA data.
Over the 24 months to 30 September 2009 the fund returned 21.85 per cent. The FTSE All Share returned -12.23 per cent over the period, while the popular IMA Sterling Corporate Bond sector achieved 4.38 per cent.
The Cayman Islands based Managing Partners Limited (MPL) Traded Policies Fund reported its sterling share class, available to retail investors, returned 10.56 per cent net of charges in the year to 1 January 2009. This is typical of the annual benchmark returns of 8 to 9 per cent minimum these sorts of funds aim to reach through portfolio construction.
However, investing is not straightforward. FSA rules prohibit UK authorised collective investment schemes for sale to retail investors from investing directly in life insurance policies.
High minimum investments are another hurdle. Typically they could be £30,000 or more.
This is partly overcome by distributing through bonds, Self Invested Personal Pensions (SIPPs), and 'wraps' used by IFAs. It means MPL’s Traded Policies Fund can be accessed through a minimum investment as low as £2,500.
Distributor status has been given or is being sought from HM Revenue & Customs for most TLP funds targeting UK investors. This will mitigate the effects of next year’s higher 50 per cent income tax rate.
Leaving aside the regulatory, tax and ethical dimensions, a number of IFAs say they feel that on the basis of recent years’ returns they may have underestimated the benefits exposure to TLPs could have brought clients.
Tim Cockerill head of research at IFA firm Rowan and Hilary Coghill, chief investment officer at City Asset Management – neither of which currently offer or recommend TLP funds to clients - said they were impressed by the performance of products such as EEA’s Life Settlements Fund.
However, there are alternatives that also promise monthly positive returns with low volatility. Absolute return funds are one example. Wider use of European UCITS III rules for authorised funds could have the same effect.
Liquidity risk, in the form of a mass exodus from the TLP market at the same time, or counterparty risk, as exemplified by the bankruptcy of Lehman Brothers but in this case regarding the strength of the policy insurers, are other challenges IFAs feel need bearing in mind.
This article first appeared in the Daily Telegraph.