The Queensland-based Life Settlements Wholesale Fund topped $1 billion under management during March, but its 1000 per cent growth in a year has put pressure on returns.
Seed investment from seven Australian institutional clients, including Victorian Funds Management Corporation and four large super funds, has seen life settlements become one of the industry’s fastest growing asset classes.
Marketing itself as an asset genuinely uncorrelated to equity markets, life settlements have been generating interest as investors cut their traditional equities exposures. The Life Settlements fund purchases the life policies of high-net-worth individuals (the average policy size is over US$4 million) at a discount, allowing the owner to release some of their equity. The fund then pays the premiums until the person dies, at which point it is entitled to the full face value of the policy.
In 2006/07 the fund returned 19.57 per cent. In the financial year to date the return has been 6.06 per cent. While outperforming the market, these returns do not appear as immune from its vagaries as the fund claims. Stephen Knott, director at the Life Settlements Wholesale Fund, said returns had been diluted the volume of money flowing into the fund. “We’re spending inflows as they come in, buying a large number of policies every month – but the policies can take 30 to 60 days to settle, so there have been periods where up to 20 per cent of the fund has sat in cash,” he said.
Also, Knott said the increased demand has widened the variety of life polices being purchased. Initially the fund only purchased a small number of polices with a short time to maturity – ensuring it quickly realised gains. The fund now has 488 policies, and the average remaining life expectancy of a policy holder has increased since inception from 40 to 60 months. Thus the returns from this year’s inflows will not be realised immediately. “We are trying to get exposure to a wide variety of polices,” Knott said.
The institutions investing in the fund were reluctant to be named as they were currently in the process of topping up their positions, Knott said. In April, the fund received a further $150 million, and Knott said he believed the fund could be managing $2 billion within the next 12 months. “We don’t expect growth to be as strong as it has been, but we are confident we will continue to get significant mandates,” he said.