In the last 12 months, there seems to have been no shortage of endowment policyholders entering the Tep market.
Research by Surrenda-link reveals that a huge number of people in the UK are looking to cash in their policies.
The APMM claims that 70 per cent of all endowment policies are sold or surrendered and estimates the potential size of the market at £1.2bn.
The Tep market is evolving, with a move away from buying and selling individual Teps towards investment in Tep funds.
Once upon a time, a Tep buyer would typically be a wealthy individual but institutions are increasingly recognising the long-term investment opportunities offered by Teps.
The minimum investment level for certain funds has dropped to £5,000 and the opportunity to invest in a Tep fund is open to a whole new set of investors who can diversify their assets. The pooling and diversification of endowment policies within a fund reduces the risk of Tep investment still further.
A well managed fund spreads investment across a wide range of policies from a broad span of life offices. Unlike a diversified unit trust, the risk of a Tep fund is tempered by the guarantees (sum assured and declared reversionary bon-uses) attached to the Teps in that fund. It is recommended that investors consider Tep funds which have guarantees above the value of the fund so that the downside is limited by the level of the guarantees. This low-risk asset class is made even more attractive when you combine it with a range of complementary lowrisk asset classes, for example, property.
Hybrid funds can combine a strong capital growth record with better risk red-uction as the cycle in which the two asset classes react to economic changes is slightly different.
Research shows that, historically, the combined performance of a joint property and Teps portfolio would have been less volatile than a portfolio invested solely in property or Teps but with the same levels of expected return.
If planning for future expenditure such as university fees, a wedding or retirement, a fund with a fixed end date can help but it is not the only aspect.
Investing in highergrowth, low-risk multimulti-asset funds can be another option to traditional investment vehicles such as pensions and an alternative to Isas which are no longer as attractive as they once were.
Another appealing aspect of Tep funds is the possibility of windfalls which represent a significant potential gain.
Standard Life's decision to vote on demutualisation makes this a very real possibility. If the vote in 2006 is in favour of demutualisation, this could result in an added bonus to all those holding a Standard Life policy. A big proportion of the endowment policies within several funds are issued by Standard Life.
In conclusion, the market has evolved to utilise the versatility of the Tep and, as with any market, it has to develop to keep alive. No one knows exactly what is around the corner, for example, the possible Standard life Life windfalls.
But along with the potential for good, the effects of the bad times must be kept to a minimum. This is exactly what a Tep fund is designed to do, with inbuilt guarantees to safeguard against a negative return.
With a proven track record, Teps are certainly an option worth investigating, particularly for cautious mid to long-term investors seeking an alternative investment vehicle.
The with-profit funds of the life offices have enjoyed strong performances over the last year and their asset spread spared them from the worst of the returns in the bear market.
This bodes well for the continuing reduction in market value adjusters and for future bonus rate decisions. We believe the Tep market will continue to grow as their flexibility enables development away from the traditional trading of the occasional policy.