Fund manager Managing Partners Limited says that improvements in accuracy in the predictions of short and medium term mortality rates have resulted in stronger returns of between 7.5% and 10% a year in the traded life policy (TLP) fund management sector. This has contributed towards huge growth in the sector and MPL estimates that in terms of assets under management, the top five funds have collectively grown by over 100% in the past year alone.   

TLPs 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 well over $20bn now. 

Jeremy Leach, Managing Director of MPL said: “Returns on funds investing in traded life policies are largely determined by being able to predict the mortality rates concerning the policies bought for the funds.  The actuarial profession has made huge advances in this area, particularly over the short to medium terms of three to nine years, which have enabled fund managers specialising in investing in TLPs to be far more effective in their selection of policies.”   

MPLs Traded Policies Fund has 100% of its assets in short and medium term TLPs and has returned and annualised growth 9.54% over the past to it investors in the GBP Growth Class.  In the past quarter alone, 7% of the policies in the portfolio have matured ahead of the fund’s actuarial predictions.  
 

However, Jeremy Leach warns: “A number of TLP funds have a bias towards buying policies with longer life expectancies, in some cases over 10 years but the potential to provide an accurate mortality opinion decreases with term and these funds will, in the longer term, be more volatile.    

“Longer life expectancies are the greatest challenge within the US Traded Policy Market because to value them in a model is difficult as you have to apply a discounting mechanism for improved mortality.  This means that as time goes by, people will live longer because of improved medical facilities and treatments.”  

MPL says that 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 those that invest in them to secure a substantial degree of gearing to enhance returns and initial allocation rates.  

Funds that invest in TLPs also offer strong diversification benefits in that they have a very low correlation with equities or bonds. 

This entry was posted on Monday, January 28th, 2008 at 12:11 pm and is filed under Managing Partners News. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.