I have a large traditional investment portfolio managed by a well-known stockbroker, which has not performed very well over the last three years although the last six months have been quite good. I now have a further £100,000 which I wish to invest in an alternative investment vehicle that will give me a good return, low volatility and little or no correlation to the stockmarket or interest rates. What can you suggest?
More of my high-net-worth clients have been seeking to reduce the volatility in their portfolios and focus on wealth preservation rather than making large speculative gains.
As a wealth manager, my clients rely on me for innovative financial planning options. Due to recent innovations, we now have the opportunity to offer a new product – a life settlement fund. This is a relatively new concept. The objective is to return your original principal plus a cumulative, annualised simple yield of around 12 per cent.
In my opinion, life settlements represent a new stable-value asset class that offers a guaranteed payment free from market trends, interest rate fluctuations and economic recession or slowdown. I believe they are the most exciting asset class to have been introduced in the last 30 years.
Stable-value assets are a sub-class of fixed-income assets providing protection of principal plus consistent, predictable growth and/or returns.
A life settlement constitutes the purchase of a life insurance policy on a third-party insured who has a limited and reasonably determinable life expectancy. Policies become available when the fundamental need for life insurance disappears because of changing circumstances or a policy becomes economically inefficient.
Senior life settlements are where the third party is typically over 65 and ill health reduces their life expectancy to between four and seven years.
Life settlements are considered to be stable-value assets because they provide:
A clear expectation of payment (protection of principal).
A clear expectation of event (maturity of the policy).
Certainty of amount (no market risk).
A reasonable degree of certainty as to timing.
The individual policies purchased by the fund are issued by US life companies and benefit from the non-contestable rules that apply in the US. A contestable life policy is one that is still within the contestable period, generally, one or two years from its issue date. The insurer may refuse to pay benefits if the insured dies in that period. The most common reasons for contesting a policy are misrepresentation of the insured's health or suicide.
The life settlement fund will only buy non-contestable policies that are beyond the one- or two-year contestable period. Once a policy is past the contestable period, the issuing company cannot cancel it, except for non-payment of premiums.
The value of the policies purchased will be determined by a number of factors, including the age and medical condition of the insured, type of policy, rating of the issuing company and amount of premiums to keep the policy in force. Most types of policy can qualify including universal, whole-life and converted term.
When a mutually agreed price is determined for the policy, the owner is paid a cash lump sum, ownership and beneficiary rights are transferred to the fund, all future premium payments are the responsibility of the fund and death benefits become payable to the fund.
By pooling senior life settlements, a greater degree of certainty as to maturity is achieved, enabling the fund manager to predict the rate of return with greater certainty. I believe senior life settlements combined in a pooled product represent a measurable risk profile below that of traditional fixed income with much greater potential for return. Risk analysis indicates that these policies are marginally less safe than US government securities. Typically, the fund will buy senior life settlements with a targeted life expectancy of four to seven years. Companies issuing these policies will ususually be rated A- or better.
Proceeds of policies maturing early will be distributed to investors after making provision for the premium reserve fund and operating expenses. Advisers and managers will adhere to strict guidelines and risk management procedures in an effort to obtain a preferred annual return of 12 per cent.
The principle features of a such a fund would seem to fit your selection criteria well:
No correlation to stockmarket or bond market volatility.
No correlation to economic or political volatility
Protection of principal based on non-contestable policies from high-grade US companies.
Disclosed, measurable risk.