Investors who bought into traded life settlement policies through Managing Partners Limited face a stark choice between staying in the gated Traded Policies fund or moving to an alternative fund that they have to stay invested in for at least five years.
MPL has launched a new fund for investors after the firm placed a “temporary gate” on redemptions from the Traded Policies fund last May to safeguard the interests of investors. The fund invests in US-issued life settlement plans and targets annual growth of 9 per cent. Before the fund was gated the portfolio had delivered an annualised 8.94 per cent return since launch in July 2004.
The new Traded Life Policies fund offers investors in the gated product the option of transferring their shares to the new fund or into the Traded Life Policies bond, which is secured against the assets of the new fund. Clients cannot simply redeem assets and will have to remain in the bond or the new fund for at least five years to aid liquidity.
They can choose to remain in the old version of the fund, although MPL says it is unclear how long it will remain gated.
The firm says that so far investors holding about 15 per cent of the fund’s assets have indicated that they wish to redeem.
MPL chief executive Jeremy Leach says: “The new fund is not a gated fund but obviously there is not immediate liquidity, there is a five-year lock-in for anybody who wants to take shares in the fund.”
In November 2011 the FSA labelled traded life policies as ‘high risk, toxic products’ and called on advisers to stop marketing them to retail investors. The regulator said it was concerned investors were exposed to the risk that if US citizens lived longer than expected, investments would not perform as forecast.
The announcement brought a rush from investors to redeem assets in the funds which culminated in MPL gating the Traded Policies fund.
It also caused a wave of redemption requests in the EEA Life Settlements fund, prompting dealing in the fund to be suspended in December 2011.
In October, investors in EEA voted for a restructuring of the fund, which came into effect in January. Some 58 per cent of the shares were moved to run-off cells, which allowed investors to exit the fund eventually. The remaining shares were placed in “continuing” cells.
This is a strange one because I cannot see any way that the new MPL fund will have any more liquidity than the old one. That has to be worrying for investors.
Through the new fund and the bond, the firm will still have to pay a premium to investors, and it is difficult for it to do that.
Unless the fund can bring in new investors – which is unlikely – or sell the underlying policies – which is also unlikely – then the fund will remain just as illiquid as its predecessor.
It will be of concern to investors that they are locked in for a period of five years because there is still a lack of clarity about what will happen at the end of that period.
There does not appear to be any guarantee that clients will be able to redeem their assets after five years.
From a personal perspective, I spent a long time looking at these types of investments and I am relieved to say I decided against it.
Following the FSA announcement in November 2011, and the continued issues around the liquidity of these funds I do not see any way these kind of investments can be sustainable.
Ben Yearsley is head of investment research at Charles Stanley
There has been trouble with traded life policies for as long as I have been in the industry. I would be concerned at the prospect of another layer of cost arising from running two funds.
Dennis Hall is managing director at Yellowtail Financial Planning