• Managing Partners Limited, a leading provider of TLP funds, sees 160% growth in assets under management over past   12 months
• TLPs are an “anchor” asset class that offer stability to investment portfolios, IFA says  2nd December, 2008

A new report by Professor Merlin Stone of the Bristol Business School shows 2008 has seen a surge of money into funds that invest in traded life policies (TLPs) as market turmoil forces investors to seek steady, predictable returns uncorrelated to equities or bonds. TLPs are US-issued, whole of life assurance policies sold before the maturity date to allow the original owner to enjoy some of the benefits during their lifetime.

The report, entitled The Market for Traded Life Policies, estimates that investment in TLPs by both retail and institutional investors has risen by more than 50% over the last year. Professor Stone points out that the combined assets of the five largest funds distributed in the UK grew from $405.2 million on 1 November 2007 to $621.4 million on 1 November 2008. The report estimates that investment by retail investors into these funds rose from $101.3 million to $155.3 million, or 53%.

Managing Partners Limited, a leading provider of TLP funds and sponsor of the report, has seen investment in its own Traded Policies Fund rise from $38.8 million to $100.8 million, or 160%, over the 12 months to 1 November 2008, of which around 25% has come from retail investors.

Professor Stone believes that one of the main reasons why funds investing in TLPs are likely to grow in popularity among retail investors is that they could be a strong replacement for with-profits based investments.  MPL research reveals that only 13% of IFAs have a positive view on with-profits based investments and that a staggering 64% of investors with these investments are unhappy with their current performance, with 25% intending to stop investing in them.  Funds investing in TLPs are relatively low risk and offer attractive returns of around 8-10%, meaning that they could be a viable alternative to with-profits based investments.

Professor Merlin Stone said: “TLPs should – and no doubt will be – acknowledged as a significant asset class one day. They have proved to be uncorrelated with other asset classes, under the most difficult conditions seen on Western markets in living memory. If they can produce double-digit returns in such an environment, then it is hard to imagine the conditions in which they would fail to do so. With such a track record, a deepening understanding of them among investors and further refining of the market, TLPs cannot fail to fulfil the potential described in so many respected studies of the market.”

Jeremy Leach, Managing Director of MPL, said: “The market events of the last year have proven the real value of TLP funds’ ability to deliver steady, predictable returns, no matter what is happening to other asset classes. As such they are an ideal replacement for with profits products, which offered the same promise but failed to deliver. As more retail investors and their financial advisers appreciate the benefits of TLPs then we can expect there to be even more significant increases in investment into them in 2009.”

Indeed, in a case study in the report, Nigel Newlyn, Director at Argent Personal Finance Managers, a City-based IFA, describes TLPs as an “anchor” asset class that provides stability to his clients’ portfolios.  He said: It serves our purpose to have a percentage of portfolios invested in assets which are solid and chug along no matter what markets do.”

Professor Stone’s paper, the second edition of a paper he published in 2007, identifies a number of key reasons for rapidly growing demand from retail investors for funds investing in TLPs:

Greater choice: The TLP market was worth around $13 billion in 2005, but it is expected to grow by on average around $5.92 billion a year between then and 2030, when it could be worth around $161 billion.  This means that there is much greater choice and opportunities for TLP fund managers when deciding which policies to buy which should have a beneficial impact on performance.
 
Reduced risk: TLPs are guaranteed to grow in value because in the vast majority of cases, the maturity value is known at the outset and the price offered for policies is always at a substantial discount.  This certainty means that TLPs remove some of the risk associated with more mainstream investment asset classes.
 
Improved life expectancy estimates: The TLP fund management industry has dramatically improved its life expectancy estimates.  The industry has been able to develop more robust claims data and improve its actuarial models, improving the quality of TLPs held in their funds.

Low correlation: The performance of TLPs is not tied to other asset classes such as equities and bonds.  This provides investors with another opportunity to diversify and reduce risk.

Track record of attractive returns: TLP funds have been able to deliver consistently attractive returns for less risk. For example, the Sterling Growth share class in MPL’s Traded Policies Fund has returned 10.33% over the year to 1 December 2008 and 17.29% since its launch on 15 March 2007.

Improved regulatory environment: New regulatory codes covering the TLP market have recently been passed in a growing number of US states which will contribute to the growth potential of the market by providing an environment in which it can flourish.

Professor Merlin Stone said: “TLPs should – and no doubt will be – acknowledged as a significant asset class one day. They have proved to be uncorrelated with other asset classes, under the most difficult conditions seen on Western markets in living memory. If they can produce double-digit returns in such an environment, then it is hard to imagine the conditions in which they would fail to do so. With such a track record, a deepening understanding of them among investors and further refining of the market, TLPs cannot fail to fulfil the potential described in so many respected studies of the market.”

However, in reviewing the TLP market, Professor Stone has identified a number of risks that investors need to be aware of.  These include:

Life expectancy estimates: If the life expectancy estimates turn out to be inaccurate and the average life assured lives longer than predicted, the return on that policy will be lower.    The fund manager needs to purchase a large number of policies so that the risk of inaccuracy is balanced by spread.  They need a strong claims experience which can be factored into a robust actuarial model to ensure that the returns on their fund are smooth as opposed to spiked.   Fund managers should obtain at least two life expectancy estimates on each policy that it plans to purchase and reject them if there is too much disparity between them.

Premium Liability:  In addition to the impact on yield, if the average life expectancy on a policy turns out to be inaccurate and premiums must be paid for longer than anticipated, this will reduce the net asset value.

Currency Risk: TLPs are US dollar-denominated assets. However, any fund that has non-USD share classes can be hedged to reduce currency risk.

Liquidity: The TLP market is similar to most other financial markets in that assets are freely traded. However, the timing needed to settle a trade is longer than in many financial markets due to the specialized nature of this asset class. For this reason, liquidity risk may arise if the sale of one or more policies takes longer to complete.

Counter party risk: There is a risk that the insurance company that issued a policy which a fund has purchased may default on its obligations to pay out upon maturity of a policy. This risk is reduced by policy spread or by diversifying across a range of insurance companies’ policies and also by the fact that each US State operates a compensation scheme that indemnifies policyholders against insolvency of the issuer.  Professor Stone says that a fund manager has to demonstrate a spread of assets, and in the case of TLPs, this means a spread of insurance companies taking into account their different credit ratings.

Contestability law - In the US, contestability law prohibits an insurer from repudiating a claim on any grounds once a policy has been in force for at least two years. This risk can be avoided by not buying contestable policies. However, there is a risk that the two-year period may be extended to five years at some stage.

For a copy of the report, call MPL on 0207 816 2625 or email Sharond@managing-partners.com

For further information, please visit the website: www.managing-partners.com.

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