Wealth managers remain sceptical on life settlement funds

An interesting investment concept, and I feel a valid one for those smarter investors seeking true portfolio diversification.

Re the lack of objectivity in the valuation basis used, I can recall the same argument made against commodities and hedge funds during the later 1980's and early 1990's. I bet those fund managers mentioned have bought into these vehicles in spite of this initial scepticism some years back....

One thing alarms me though: EEA use just Viasource? A bit of a conflict of interest here maybe? I would suggest that a fund buying policies should ideally use a variety of sources to ensure that the middlemen involved in this emergent secondary market are marginalised.

Also, I would prefer an article written by a non-marketing individual, possibly someone with an actuarial background....it is a longevity-related product after all.

The fundamental tenet of these funds is the accurate estimation of life expectancy.

'He believes that focusing on shorter life expectancies allows more accurate forecasting and to ensure valuations are conservative, once the policy is in the fund it is wise to add 12 months to the forecast of the seller’s life expectancy.'

By shorter life expectancy, does he mean three-four years? Adding 12 months for caution? Not very intellectually rigorous!

I would prefer a rigorous actuarial technique to be used: relying on medical underwriting exposes the fund to the risk of physician-policy sourcer collusion : in this case the loser is the investor.

This fund is not credible in my opinion, but the asset may be....worth exploring further, me-thinks!

Some of the comments about these funds are wide of the mark to say the least.

For Mr Lally to say the longer the life assured lives the lower the net return completely misses the point. He may as well say the shorter the period the insured survives the greater the return.......

The funds are modelled on actuarial assumptions of life expectancy and by investing through a fund you have diversification. What advisers need to question (amongst a myriad of others) is the actuarial assumptions being used and the degree of 'margin' factored into the life expectancy assumption. Lets understand one thing, actuaries have been making assumptions on life expectancy for hundreds of years. I would like to think they might have a pretty good idea by now. From the funds I have looked at in detail approx 50% of deaths are before LE and 50% post LE........i.e. the assumptions are fairly accurate.

Regarding the comments on liquidity, you need to look under the bonnet and find out how much cash is held within the fund before saying they're illiquid. Further, the policies are traded between funds and can be sold on. Providing clients invest with their eyes wide open and are fully aware of the facts theses funds are suitable for the right type of client. They are not utopia but do offer the potential for steady returns over the medium to long term.

Quentin McCormick's comments rightly highlight the issue that some of the previous commenters demonstrate a fundamental lack of understanding of the industry in which they work.

How do these people think life companies decide what income to offer on an immediate benefits care plan, or on a standard or impaired pension annuity?

I am not saying that life settlement funds are for all IFAs or all clients (BOTH have to be able to understand the concepts and risks as with any other investment) but when structured and managed well they have a place in a diversified asset class portfolio in the same way as other "new" asset classes have become part of the norm over the past 30 years.

Useful comments above.

Like others I've found these funds to be interesting but have held back.

I understand the return mechanism and find it compelling - these funds are just capturing the imbedded value from US life offices.

My big problem is that the people running and valuing the funds are the same, which creates a massive conflict of interest.

To be fair, the better fund recognise this and have 3rd party auditors. However, I have yet to be convinced than any are foolproof.

Call me paranoid but post-Madoff and Cru I need better safeguards.

A monthly statement from the 3rd party auditors available to advisers and investors would be a start.

Dear Graham,

Couldn't agree with you more. Why do the likes of Citywire bother quoting people who clearly don't know what they're talking about!

Regards,

Q.

Tim,

I'm not quite with you on this one....so please bear with me........Are you saying that SLS funds don't have independent auditors as that's not my understanding. For instance, ARM uses PWC as auditors.

If were a PWC partner I would want to make sure that whoever within PWC was signing off the accounts to ARM knew what they were doing.

If your aware of a fund that doesnt have independent auditors I would appreciate the info: qmccormick@greystonefs.co.uk

I do see your point regarding monthly info but most of the companies I deal with produce monthly fact sheets anyway so to expect an audited statement each month might be taking it too far. After all, how many traditional(and hedge) funds have a monthly audit.

Q.

I have no problem with the general concept of this fund, having been aware of such investments since 1969.

The statistical basis and data goes back to the 1750s.

The two aspects that would cause concern in respect of EEA are

a) the single source of the purchases (for people who invested with Shepherds this would make their blood run cold); and

b) no third party valuations - the temptation to manipulate when under pressure would be exceedingly high.

I know that in the current market many people will be prepared to take the risk, but for advisers good governance would require a healthier level of diversification of responsibilities.

We should learn from history - occassionally.

FYI