UK-US Interest Rate Differential Creates Opportunity For Hedging Plays, Says MPL
Managing Partners NewsJune 7th, 2007
Managing Partners Limited (MPL), a Cayman Islands-based fund management group that invests in traded life policies (TLPs), says diverging
MPL says UK rates are set to rise, with the base rate most likely to be 6% by the end of the year, while he expects the US Fed rate will be lower than its 5.25% current level by then.
Sterling funds can hedge by first placing the sterling on deposit and borrowing in the foreign currency to purchase the investments. A forward cash swap is then purchased for a later date. If for example, US and UK interest rates are at parity, then no gain is made on the interest rate differential. But if
Jeremy Leach, Managing Director of MPL, commented: “Some analysts are predicting a further rise in US interest rates before they start to fall. But they are focusing too much on recent economic data. The US authorities realise that higher rates could tip the economy into a recession. US interest rates and the dollar will be lower by the year-end, and that will mean better returns for hedged funds, even if they have a neutral swap rate.”
Investors looking for steady, predictable returns should consider investing in Traded Life Policies (TLPs). These are United States-issued life assurance policies sold before the maturity date to allow the original owner to enjoy some of the benefits during their lifetime. TLPs are purchased at a discount from their maturity value, which in the majority of cases is fixed at outset, which means that they are guaranteed to rise in value. The TLP market has seen huge growth from $50m in 1990 to $10bn in 2006.
While TLPs carry the risk that it is unknown when the lives assured will die, the key attraction of a TLP fund is that with the right diversification and actuarial analysis, they can be used to deliver steady, predictable returns. Because of this high degree of certainty and their solid underlying value, it is possible for products that invest in them to secure a substantial degree of gearing to enhance returns and initial allocation rates. This is particularly attractive to UK investors in countering the surrender penalties imposed for pulling out of with profit funds.
For retail investors, MPL offers the Corinthian Growth Fund. The fund is a fully-regulated Cayman Islands mutual fund that can be included in personal portfolio bonds, wraps and SIPPs. A popular feature of the fund is its 2X-leverage facility, enabling returns to be enhanced. The fund has no initial charge and a 103% allocation rate. The annual management charge is 1%. It has a 7-9% annual growth target net of all charges.
Corinthian offers an ‘enhanced growth’ share class to retail investors, which has a 103% allocation rate and a 1% annual management charge. Such shares are suitable for investors looking to transfer assets from funds that have failed to deliver on expectations, such as with profits, and which need an initial boost to the investment.
For institutional investors, MPL offers Traded Policies Limited, another Cayman Islands-regulated mutual fund with sterling, dollar and euro share classes. Sterling growth share classes also exist in the fund for private investors.