Funds that invest in traded life policies with the right diversification of policies, prudent actuarial analysis and due consideration to increasing life expectancies can deliver steady returns, says Jeremy Leach, managing director of fund management company Managing Partners.
Leach says the Financial Services Authority is right to raise concerns about products in the traded life policy market, but points out that all of these concerns were raised in the Merlin Stone Report of 2008.
That report said the rapidly growing popularity of traded life policies has its dangers and that traded life policies are still widely misunderstood, even by institutions. The growing use of securitisations is a particular concern.
Leach says: "But none of this detracts from the fact that funds that invest in TLPs with the right diversification of policies, prudent actuarial analysis and due consideration to increasing life expectancies can deliver steady, incremental returns of eight to ten per cent a year that are uncorrelated to other financial markets. The positive performance of several TLP funds in recent years proved this to be the case despite some of the worst market conditions imaginable.”
According to Leach, investors need to look at transparent, open-ended investment funds with reasonable track records and conservative charges from product providers with authorised distributors in the UK.
“They should avoid those funds that have performance fees because this raises the issue of moral hazard and secondly because funds are buying an asset class with a fixed maturity value and limited upside potential, so the only way to gain alpha is by having conservative annual management fees,” he says.
"IFAs have a tough job because they need to assess this asset class and it is only right that the product provider or promoter provides the information needed to assess suitability and risk."