Institutions throughout the UK and Europe, particularly pension funds looking to match their liabilities, are increasing their investment in traded life policy funds, delegates at a roundtable staged by Managing Partners Limited concluded this month. Volatility in equity and property markets is making TLPs particularly attractive in 2008 because they offer steady, incremental returns irrespective of what happens in other asset classes.  

TLPs are whole of life policies issued in the United States. They are sold before their maturity dates to allow the original owners to enjoy some of the benefits during their lifetimes.

Jeremy Leach, Managing Director of MPL, told the debate that there was a substantial knowledge gap among retail investors about TLPs, but that institutional investors were much further ahead in their understanding of this new asset class. He said: “European pension funds have recognised the value of TLP funds, not least because the smooth, predictable returns make them an ideal asset class for liability-driven investment. Many small private banks and discretionary managers in Europe are also packaging TLPs into more sophisticated products.” Some institutions are even issuing derivatives linked to the pools of TLP assets they hold. While this is still an early-stage development, it signifies how sophisticated the market in TLPs has become. 

Mr Leach added: “2008 offers a stellar opportunity to TLP fund managers because investors have lost faith in equities but interest rates on deposits are so low. Investors need to consider an asset class that delivers 8-10% year in, year out.” 

Professor Merlin Stone of the Bristol Business School told the debate that an asset class offering steady, predictable returns was very useful in addressing the increasingly important challenge of longevity risk. Professor Stone said: “People are living a lot longer than expected and steady, predictable returns are a great tool to have in preparing for that, although this can also be a risk if the longevity estimated by the actuaries who value TLP funds turns out to be an underestimate. However, so far, the opposite tends to have happened.”  

Professor Stone added: “The dream of a reasonable return with the investor staying for a reasonably long period is what with profits was meant to be about. It is desperately unfair that there is a whole generation of people with money sitting in with profit pension funds who might have their retirement sullied because some of the life and pensions companies messed up, while the government has no idea what to do about pensions. People are worried but they just do not know what to do.” 

Gary McLelland, Managing Director of Jersey-based Corinthian Financial Services, said Corinthian had been a promoter of with profits in the past but that since 2003 the company had been looking at alternative strategies for clients. He said:  The advisers of clients who invested in with profits have been bitterly disappointed by their performance and lack of transparency. We have been let down by insurance companies and the all-singing, all-dancing investment strategies that we have known for 40 to 50 years and which have now failed to deliver.  

“We have a duty of care to our clients to protect their assets and deliver solid returns without shooting the lights out. And in that we have been living the dream for the last two years that we have run TLP funds. They do work. What you see is what you get with them and clients can achieve the investment targets they set themselves.” 

Key conclusions by attendees at the debate included:

• Institutions across Europe, particularly pension funds looking to match their liabilities, are investing significant amounts inTLPs, but there is still a considerable knowledge gap among other investors
• TLPs constitute a new and substantial asset class that should be recognised as such
• Volatility in equity and property markets will make 2008 an ideal time to invest in TLPs
• TLPs, which offer steady, incremental returns, are an ideal replacement for with profits – whether savings or pensions, which have left savers bitterly disappointed in recent years
• There are risks to managing TLP funds but these can be controlled by buying policies with life expectancies on the lives assured of 5-6 years and by using prudent actuarial analysis to value funds

A new Traded Life Policy Fund Index launched by MPL at the beginning of this year showed strong growth for traded life policies asset class and pointed to a doubling of the market in just over a year. 

The Index tracks the size of five leading funds specialising in Traded Life Policies (TLPs) on a quarterly basis.  In the 12 months to 1^st January 2008, the Index shows that the collective size of the funds it monitors grew by a staggering 106.70%.  Their combined assets under management increased from $219.358 million to $453.414 million, a rise of $234.056 million or around $19.50 million a month. 

This entry was posted on Friday, April 25th, 2008 at 11:26 am 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.