Life Settlements are Proving Their Mettle as Markets Collapse Worldwide, MPG Says
Asset class is set to see price rises as popularity strengthens
Life settlements are proving their worth as a non-correlated asset class as financial markets melt down globally due to the corona virus outbreak, according to Managing Partners Group (MPG), the international asset management group.
Life settlements, also known as traded life policies (TLPs), are US-issued life insurance policies that have been sold by the original owner at a discount to their future maturity value and are institutionally traded through a highly regulated secondary market.
Latest data1 shows that life settlement prices have remained stable since the outbreak began and are up over 12 months: the internal rate of return (IRR) on the asset class was 14.5% in February, versus 13.9% in January and 17.0% in February 2019, indicating that prices had fallen just 2.5% on the month but had risen 12.5% on the year.
MPG’s High Protection Fund, which invests in life settlements, has also performed well: its USD Growth share class returned 0.76% and 9.02% after charges in the month and year to the end of February respectively. The Fund has also outperformed the S&P 500 in the longer term, returning 44.83% over the last five years compared with 25% by the index.
Jeremy Leach, Chief Executive Officer for Managing Partners Group, commented:
“Equities have been overpriced for some time and an event of some kind was always going to spark an overdue correction. Highly liquid assets are being hammered but life settlements are largely unaffected – they are correlated with mortality rates, which are certainly not set to fall because of the corona virus.
“Life settlements are increasingly being seen as a defensive asset class by investors and their prices are set to rise as their popularity strengthens.”
MPG’s Vita Nova Hedge Fund has been divested almost entirely out of equities since the end of 2018, when MPG anticipated that a major event-driven correction was on the horizon. It is still positioned defensively in the expectation of such an event.
MPG’s award-winning High Protection Fund has also benefited from its exposure to US life settlements, which have already seen pricing increases of around 15% over the last six months and are poised for further rises as demand continues to increase.
Life settlements currently trade at values that deliver an average IRR of 14%, which is well in excess of the risk-free rate, delivering attractive returns to investors. Further reductions in IRRs will increase the market value of Life settlements so there is an ‘alpha’ appeal for the asset class also.
The reason for their continued increase in popularity is that they are perceived to deliver an absolute return and therefore portray much less volatility than other asset classes. After 100 years of continued improvement in mortality, the average death rate for elderly people appears to have plateaued and people are no longer living any longer than previously.
Unlike other asset classes, which are likely to see pricing pressure as a result of the spread of corona virus in North America, Life settlements funds are more likely to see spikes in their returns rather than drawdowns.
The Vita Nova Hedge Fund aims to achieve long-term capital growth by identifying short- to medium- term investment opportunities with inherent pricing weaknesses and the potential to improve over time. The investment management team may rely on economic forecasts and analysis in respect of interest rate trends, macroeconomic developments, global imbalances, business cycles and other broad systemic factors that may lead to arbitrage and alpha opportunities.
The High Protection Fund is an absolute return vehicle that aims to deliver long-term capital growth of between 8-9% per annum by investing in a portfolio of life settlements.
MPG is an award-winning business, having been named the 2018 Alternative Investment Firm of the Year – Europe by The European business publication and 2019 Asset Management Company of the year – UK and Europe by ACQ5 Global Awards, while its High Protection Fund won the Best Diversified Fund (Five Years) and Best in Insurance-Linked Investments categories for two years’ running in the 2018 and 2019 Corporate USA Today Awards. Most recently, MPG has won the award of Most Outstanding Asset Management Company 2020 in the Acquisition International 2020 Global Excellence Awards.MPG is a multi-disciplined investment house that specialises in the creation, management and administration of regulated mutual funds and issuers of asset-backed securities for SMEs, financial institutions and sophisticated investors. It currently manages funds with a gross value of $500m.
1Source: AAP Life Settlement Market Update, February 2020
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