28th July 2010

Time for Life Settlement Funds to grow up?

High, smooth, uncorrelated, and risk free returns. Sound familiar? Sounds like a life settlements promotion to us.

Only a handful of years ago few IFAs were even familiar with longevity as an asset class, now retail money is pouring in like there's no tomorrow.

Most retail funds use mortality based valuation models. These produce apparently smooth returns but have a built in problem. What happens when the market value of the underlying assets is less than the book value?

The credit crunch caused market prices to slump by somewhere up to 50%. This was coupled with stricter mortality assumptions. It's easy then to see how funds using mortality based valuation models could be seriously overstating the real value of their funds.

This in turn means that the sector could be an accident waiting to happen for retail investors.

A solution is that these funds update their valuation model but new money will dry up as performance falls. A trickle of liquidity requests can become a torrent and when encashments outstrip investments the gate can soon be bolted.

Longevity is a potentially illiquid asset and relatively complex - there are side issues regarding regulation, transparency and withholding tax too.

In short it's a grown up asset that needs to grow up.

Conduit does have history in the longevity sector - suffice to say that you live, learn and make changes (unless you're a complete fool) - which is why we now promote a life settlement fund that features a mark to market valuation model.

Jeremey Askew
Conduit Financial Solutions
Tel: 020 3239 5868

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