The Gold Coast-based Life Settlements Wholesale Fund, in which VFMC is an investor, was optimistic about its chances of outperformance over the coming months, as the Australian dollar fell back to what looked like a semi-permanent home around US65 cents. The Australian dollar position at near parity with the US for most of last year has been disastrous for the Life Settlements fund. It returned -5.87 per cent in 2007/08.
The fund purchases US life policies at a discount to their payout, pays the premiums until the policyholder dies, and then collects the full face value of the payout from the insurer. The funds’ performance unit price is related to an ongoing actuarial assessment of the underlying policies’ ‘time to maturity’ against the ongoing cost of premiums, so the fund should keep on performing, even in a financial crisis.
But as the policies are held in US dollars, the currency movements of the past year have twice erased the returns in the fund’s Australian units. The US units of the fund returned 6.92 per cent in 2007/2008. “All international managers have been affected by this to some extent, but given the fact that we’ve got reasonably positive investment performance in the US units, I’m confident that as the dollar stabilises our returns will move back to the top of the pack,” said Stephen Knott, director at Life Settlements.
Knott said that the fund originally decided against hedging currency, reasoning that investors could account for that risk within their own portfolios. But now it has plans to launch a second Australian fund that will provide institutional clients with access to US units. The development of that product will be overseen by Ben Kilmartin, whom Life Settlements hired three months ago from JP Morgan Asset Management in New York in a product development and marketing role.
Knott also said that the fund was not exposed to any risk from the 49 polices (9.78 per cent of the total fund) it held that were in the names of subsidiaries of AIG. “Insurance polices in Australia are issued out of their statutory funds, which are legally separate from the assets of the parent holding company. We are expecting there might be some downgrades in terms of the credit quality of the policies, but all of the ones we hold are in the upper echelons of credit ratings as far as their ability to pay premiums are concerned.”
Knott is hopeful that the fund will begin to pay dividends by the end of this financial year. The majority of polices have been held for just over a year now, and a dozen have ‘matured’. But the fund is still paying premiums on behalf of the rest of the portfolio, and so it is yet to make a net taxable profit.