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13 August 2012

“In search of absolute returns”

Patrick

By Patrick McAdams; Investment Director, SL Investment Management

The secondary life market has grown rapidly in recent years, from a turnover of $200m face value in 1998 to a turnover of $11.8bn face value in 2008, and is expected to reach $31bn face value per annum by 2017*. With growing vendor awareness of the secondary market, the continued maturation of market infrastructure, and the growth of the senior population in the US, the life settlements market is expected to continue to develop and grow.

This should come as no surprise; the attractions of the asset class are manifold. A major attraction for investors is that life settlement funds enjoy low correlation to world equity markets, providing a high degree of volatility shelter.  The same cannot be said for the more traditional asset classes of cash, bonds and equities. 

Since the downturn, market experience has seen a marked change in the perceived correlation between the "traditional" asset classes of cash, bonds and equities. Ordinarily, one would expect to see a degree of capital flow between these asset classes, such as a flight to security from equities to gilts during a time of market uncertainty: a negative correlation.  However, over the last few years, this negative correlation has declined as the traditional asset classes all fell in unison. 

Enter Life Settlements, which - in the right hands - can provide steady and predictable long term returns, making this asset class a real head-turner for investors willing to look beyond the tired old mix of bonds, gilts and equities. 

Significantly, pension funds are beginning to sit up and take notice; both Defined Benefit and Defined Contribution pension schemes have experienced a pronounced level of investment risk, accompanied by a rising tide of longevity extension risk. In response, there has been a growing trend away from the trustee model, towards more outsourcing of investment decisions to third party investment consultants. The latter are now demonstrating a willingness to explore more innovative and sophisticated approaches to generating consistent / absolute investment returns, via increased diversification of pension portfolios.

SL of course welcomes this modern and innovative new approach by institutional investors but whilst we are whole-heartedly committed to the success of Life Settlements as an asset class, we say; ensure that your chosen manager can deliver on the key requirements of effective Life Settlements asset management as there are golden rules that must be applied - but that is a different story and one we will tackle elsewhere. Read our 'Golden Rules to selecting a Fund Manager'.

*Connings, 2010