With Policy Portfolio, Beale Dobie and Irish Policy Exchange leaving the traded endowment policy market, it would be easy to assume that the Tep market was on its last legs but is it really that simple?As a traded policy pro-vider, it would be naive to argue that the market is anything other than finite but, equally, it is premature to say that it is nearing its end.
Like many other investments, Teps have been on a bit of a rollercoaster. What is frustrating from an adv-iser’s point of view is that endowments were sold on the basis of smoothed, secure returns without huge volatility.
Sadly, it was not poss-ible to predict the unprecedented collapse in the stockmarket or how life offices would deal with it.
However, the fact is that endowment policies have always been a good long-term investment, relative to inflation and interest rates, but the expectations on which consumers bought them and the basis on which life offices mark-eted them have left many policyholders with a far diff-erent opinion.
The problem is that many people are selling or surrendering their policies, perceiving that they will offer poor value. They are often just crystallising losses on policies that have not yet matured, many of which will generate ongoing if smaller than historic bonuses but bonuses that could still grow.
The consumers’ reaction is partly fuelled by the negative media coverage but mostly by the kneejerk reaction that we all know too well – selling an investment when it is low and buying when it is high.
Surrender values will remain low as life offices must protect existing customers. By surrendering a long-term contract, the exiting customer could disadvantage customers who remain within the fund.
The institutional market can and is taking a longer-term view, seeing the current low market values as an opportunity to buy at a discount to long-term value.
It is for this reason that funds should be buying policies at a price just above or very close to the current surrender values.
The table below shows what Shepherds is currently buying for its fund andI believe this is a representative sample of policies that are being invested into other Tep funds run by our peers.
We believe that the funds investing in the traded market will increasingly offer better returns due to fewer market-makers pushing up prices and the realisation by life offices that the surrender values need not be as competitive.
The gap may not widen by too much but, coupled with an almost guaranteed neutral or positive return, regardless of life office machinations in the future, the prospects look fairly good for the traded market.