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Advisers caught up in viatical fund dilemma

UK investors and IFAs who placed over 26m in an offshore Shepherds traded life fund face uncertainty as the beleaguered US company it invested through faces collapse.

The fund, which was marketed by Shepherds in 2003, buys viaticals – life insurance policies from US citizens with potentially fatal diseases.

Shepherds Select Funds plc, based in the Isle of Man, invested 85 per cent of its cash through stricken Florida-based policy market-maker Mutual Benefit Corporation. It was closed after MBC was placed into receivership last May amid accusations of securities’ regulation violations.

MBC’s receiver is returning to court next month calling for reorganisation of the way that the company pays the premiums on traded life policies. The receiver is concerned there may have been serious underestimations of life expectancy by MBC and there may not be the funds to keep up payments on the 7,184 life policies which have a total value of around 820m.

The receiver has considered selling, cashing in early and asking investors to help.

IFAs are worried that the US receiver will use Shepherds’ funds to pay premiums of older policies, such as those on surviving HIV and Aids patients who have lived far longer than MBC had predicted. This could leave UK investors in the Shepherds’ fund faced with contributing further money to keep policies alive or losing part of their initial investment.

Shepherds says losses are not certain but says IFAs will carry any liability if any shortfalls lead to claims because the fund should have been marketed to experienced investors as being high risk. But some IFAs are questioning why Shepherds invested through MBC when it was being investigated as early as 2000.

A group of advisers is co-ordinating IFAs with interests and concerns on the issue through a website at www. shepherdstlp.com. Advisers also ask why 85 per cent of the fund was invested with one firm when a ceiling of 20 per cent for any one asset class was set but Shepherds says the investment was permitted because MBC is a market-maker sourcing assets and is not a product provider.

A Shepherds’ fund based in the Cayman Islands has also been delisted, leaving Sipp and Ssas investors forced to redeem and IFAs facing repaying commission.

Select High Security Fund director Jeremy Leach says: “The investment objectives for this fund were very clear. If IFAs quantified the risks to their investors, I cannot see why they would be exposed but we have some IFAs who want to cast blame to exonerate themselves from how they considered the literature. Fifty-four per cent of the policies that we have invested in have matured before life expectancy and that money is held in trust.”

Financial Services Legal consultant Gareth Fatchett says: “The key issue here is who knew what and when.”Fund details, p2

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