Managing Partners Limited Roundtable Debate

On April 9th, Managing Partners Limited held a roundtable debate to discuss issues around traded life policies as an emerging investment class. The attendees were as follows:

Jeremy Leach, Managing Director, Managing Partners LimitedProfessor Merlin Stone, Bristol Business School
Gary McLelland, Managing Director, Corinthian Financial Services
Nigel Newlyn, Director, Argent Personal Finance Managers
David Chinn, a Partner in the Financial Services division of Oury Clark

Traded life policies 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. They are purchased at discounts to their maturity values, which are usually fixed at the outset so they are guaranteed to rise in value.

TLP funds offer steady incremental returns that tend to lie somewhere between those available on cash deposits and bonds. They have come to the fore as an asset class as investors have sought alternatives to the traditional asset classes of equities and bonds amid the financial market instability of recent years.

The underlying TLP market in the US has grown substantially from $50m in 1990 to $20bn in 2006, according to the Merlin Stone Report published in October 2007. This growth has occurred not least because increasing numbers of policyholders have realised they could get a better price for their policies on the second-hand market than they would get if they surrendered them back to the insurance companies.

Key conclusions by the attendees included:

  • 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
  • Institutions across Europe, particularly pension funds looking to match their liabilities, are investing significant amounts in TLPs but there is still a considerable knowledge gap among other investors
  • TLPs, which offer steady, incremental returns, are an ideal replacement for with profits – whether savings or pensions, which have left investors bitterly disappointed in recent years
  • Many IFA clients with substantial pension pots are looking for steady returns of cash-plus-2% combined with capital preservation, which TLPs can offer
  • Current differentials in interest rates between the US and UK/Europe mean currency hedging can be used to enhance TLP fund returns
  • 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

Below is a summary of some of the main points raised by each attendee at the debate:

Jeremy Leach, Managing Director, Managing Partners Limited

  • TLPs constitute a non-correlated asset class because they are not influenced by bond or equity markets. The actual size of the TLP market means it cannot be dismissed as unpopular or insignificant. The Merlin Stone Report points out the TLP market is expected to grow to $161bn by 2030, and something like a trillion dollars of life cover lapses in the US every year. The problem is that UK and many European investors do not understand them
  • European pension funds have recognised the value of TLP funds and are investing significant amounts in TLP funds, not least because the smooth, predictable returns make them an ideal asset class for liability-driven investment for pension funds. Many small private banks and discretionary managers in Europe are also packaging TLPs into more sophisticated products
  • Some institutions are now issuing derivatives linked to the pools of TLP assets they hold. This is still an early development, but signifies how sophisticated the market in TLPs has become
  • 2008 offers a stellar opportunity to TLP fund managers because investors have lost faith in equities but interest rates on deposit accounts are so low. Investors need to consider an asset class that delivers 8-10%, year in, year out
  • The differentials between US interest rates versus UK and European rates can be exploited to enhance returns in TLP funds
  • The challenge is that it is not an easy asset class to understand. Institutions, which buy a lot of TLP funds, have invested substantially in TLPs. But there is a knowledge gap among high net worth and retail investors, who have yet to fully grasp how TLP funds work and can deliver steady returns that are higher than those available in cash
  • There are risks with managing TLP funds, as with any investment. But these can be minimised by investing in policies where the lives assured have life expectancies of 5-6 years, by using larger medical underwriting firms to get more reliable life expectancy estimates, and by employing independent actuaries to value the assets held in a fund

Professor Merlin Stone of the Bristol Business School and author of the Merlin Stone Report: The Investment Potential in traded Life Policies for the UK investor, published October 2007

  • TLPs are an asset class designed to help fund managers get it right. They give a better return than cash and do not give any nasty surprises. One can never say that risk is zero, but investors are very likely to get their expected return
  • Longevity risk is becoming a more important issue. People are living a lot longer expected and steady, predictable returns are a great tool to have in preparing for that, but 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, with underwriters being conservative
  • The dream of a reasonable return with the investor staying invested 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
  • One of the big problems with endowments was that consumers were so gullible about the nature of the risks involved. TLPs are a million miles away from that and the risks are really quite transparent
  • There is a genuine knowledge gap among investors. One would like to see far more attempts made by the professionals involved to explain the risks involved in investment products and the underlying assets held in them. That way, investors could make much better decisions
  • Many investors do not necessarily want to make extensive drawdowns from their investments, or massive gains. They just want to keep their assets and make a reasonable return so that drawdowns do not affect their capital value too much. TLPs offer a way to do that
  • Investors are running to cash because they do not want to invest. But many of them are unaware of TLPs and that it is a good asset class for pensions and long term investments
  • Addressing the lack of awareness about TLPs is not just about the FSA educating the “man or woman in the street”. It would be great news for investors if there were more TLP products around and there was better understanding in the media about what TLPs mean as an asset class
  • Risk is controlled in TLP funds because managers are buying policies from people in their 70s and 80s, not their 60s, when life expectancies are much longer
  • The TLP market is not about coffin-chasing. It is about helping elderly people secure a cash lump sum before they die, with the consent of their families

Gary McLelland, Managing Director, Corinthian Financial Services

  • Corinthian was a promoter of with profits bonds in the past but we became increasingly disappointed by the returns and since 2003 we have been looking at alternative strategies.
  • Demographics have helped push down annuity rates, so we have had to look at alternatives that do not have the downsides of market value adjusters or reviews
  • 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

Nigel Newlyn, Director, Argent Personal Finance Managers

  • Most of our clients’ assets are in their pension funds. Therefore, they like us to take a cautious approach to investment over the long term
  • By taking a certain amount of risk we expect to outperform cash deposits by 2% pa. If we achieve more than that then it is a bonus for the client
  • We constantly look for alternative classes of investments that provide an anchor to the portfolio. TLPs are an anchor asset class as far as we are concerned
  • TLPs deliver greater returns than cash and as long as we can underpin a portfolio with this kind of asset class then we are free to do something a little more exciting with other parts of the portfolio
  • There are risks involved in managing TLP funds. New funds coming into the market take time to build up a diversified portfolio, which is a critical factor in the delivery of steady returns. As with any fund, one acquires confidence in a specific fund manager or team

David Chinn, Partner in the Financial Services Division of Oury Clark

  • Many of our clients have substantial pension funds. When they retire they are looking to maintain secure levels of income and do not necessarily look for capital growth. After all, they realise they cannot take it with them when they die. They especially do not wish to lose capital when they get to age 75, they just want to live off the income
  • Provided we can look to secure an 8% growth rate and not lose capital then clients are very happy with that. That is why TLPs feature as an asset class to us
  • Traded endowment funds initially were attractive to us and we thought TLPs were similar. However, on closer inspection we have taken the view that they are very different when you analyse what makes both types of asset perform
  • We started investing in TLP funds about three years ago but it was toe in the water stuff. We are now including TLPs in many of our clients’ investment recommendations and are using them much more. We use them in our cautious and balanced managed portfolios as well as our absolute return portfolio. These three portfolios have between 10% and 15% exposure to TLPs
  • If we can use a fund that potentially will grow at between 7% and 9% a year and actually deliver 8% then we are happy with that. It might deliver 9.5% but that could be a temporary thing. We want stability
  • Many colleagues in my firm and the industry are starting to talk about TLPs but they confuse them with traded endowments and also think of them as coffin-chasing. There is a lot of misunderstanding and lack of knowledge. Something should be done to increase people’s knowledge about TLPs.
  • At present, there is a fear of the unknown. TLPs are seen as suitable for experienced investors only, and that makes our compliance people think we are taking more risk than we are supposed to. But TLPs are really relatively low risk and are suitable for a wide range of investors

Published on 09 Apr 2008 at 06:11 pm