Several of the traded life policy funds distributed in the UK run the risk of actuarial error because the average value of the policies they hold is too high, according to Managing Partners Limited (MPL), the boutique fund manager.
Research by MPL shows the average value of policies held in the funds isUSD1.9m, which would have been held by policyholders much wealthier than the ‘Average American’ upon whom life expectancy tables reflect. The average value of policies held in the traded Policies Fund managed by MPL is USD680,678.
TLPs are US-issued whole of life policies sold before their maturity date to allow the original owners to enjoy some of the benefits during their own lifetimes. By building diversified portfolios of TLPs and carrying out the right actuarial analysis, fund managers can use them to deliver steady returns that are uncorrelated to other financial assets.
Jeremy Leach (pictured), Managing Director of MPL, says: “The Valuation Basic Tables are the standard reference for life expectancies in the US and by default they reflect ‘Middle America’. They take no account of the underlying wealth of individuals. But the fact remains that a sample of wealthier individuals will have the prospect of living longer than the population average.
“Underestimating the time to maturity of policies raises the risk of having to pay premiums on policies for longer than expected and reducing the investment returns on a fund. With the Traded policies Fund we believe it is much more prudent to buy policies on lives assured who are more representative of the US population (i.e. closer to the average American). This may reduce the economies of scale related to higher value policies but it does reduce the actuarial risk alluded to by the FSA in its recent paper on product risk by acquiring a sample population that is more representative of the US population and by maximising counterparty spread.”
MPL’s ‘Traded Policies Fund’ was an outstanding performer during the financial crisis. The GBP Growth share class in the fund, which is available to retail investors in the UK, has returned 42.24% net of all charges from its launch on 15 March 2007 to 1 March 2011, equivalent to an annualised return of 9.41%. The Institutional US dollar share class has delivered an annualised 8.94% since its launch on 30 June 2004 to 1 March 2011.