Alex Lee

Life settlements is a form of financing extended to an individual (usually a senior) backed by that person’s life insurance policy.

A life settlement fund generates returns for investors by holding insurance companies accountable for the promised death benefits upon maturity of the individual’s policy. A well-managed portfolio provides investors with potential returns comparable to that of equities, but with less volatility and with no correlation to equities or other investible assets.

As a life settlement fund, the Laureola Investment Fund (USD) rose +0.9% in December, taking CY20 performance to +9.6% with a volatility of 2.0% vs the S&P500 Total Return Index’s return of +18.4% with a volatility of 24.8%. Since inception in May 2013, the Fund has returned +16.2% p.a. with an annualised volatility of 5.6%.

CY20 annual return was within the expected 8% to 12% range for the Fund. While the Fund’s annual return was below that of US equities, it was ahead of 8 of 12 major global asset classes including global REITs, government bonds, high yield bonds, and European equities.

For superior long-term results, the trick is consistency. A steady 8% to 12% annual return places the Fund second among the 12 major asset classes over the past ten years, and third, out of the 12, over the past 3 years. In addition to consistency, the Laureola Investment Fund offers no correlation to equities and bonds.

The quality of returns is critical in life settlement funds – the more generated from realised gains, the better. In 2020, 100% of the Fund’s returns were generated by realised gains. Cash profits (i.e. realised gains) are the highest quality returns from any type of investment.

Life settlements are heavily regulated in the US and can be suitable for ESG-biased investors. The US government recognises the social good that life settlements provide. Life settlements provide better financial outcomes for seniors and promote better corporate governance within insurance companies. To that end, regulations are introduced not to limit life settlements transactions but to promote and encourage responsible behaviour amongst participants.

By Alex Lee CFA, Director, Investor Relations – Australia and New Zealand

The post Life settlements part of alternative fixed-income universe appeared first on AdviserVoice.

Alex Lee

The stable core of a portfolio consists of ‘bedrock investments’. Their role is to generate stable, consistent returns over time. Ideally, the returns are not correlated to the returns of the risky asset. With this stabilising force, the portfolio can then take greater levels of risk in its growth asset allocation.

Traditionally, fixed income instruments have played this role. Bonds provide the stability and consistency to preserve a portfolio’s returns while the riskier equities hunt for higher returns. However, unfavourable changes in correlation between equities and bonds over time nudged investors to evaluate the suitability of other potential bedrock investments.

“We suggest investing in life settlement as a strong bedrock candidate on the basis of the following historically observed attributes,” stated Alex Lee, Laureola Advisors Inc’s Director of Investor Relations, Australia/New Zealand.

Using the Laureola fund as a proxy for life settlements, Chart 1 shows the distribution of a life settlement fund’s annualised returns over multiple 3-year periods. The fund’s returns tend to be higher than that of the ASX200 Index and 3-year bank term deposit rates since May 2013. This highlights the consistency of performance (and potential outperformance over equities) over a 3-year timeframe.

Chart 2 highlights the stability of monthly returns. The narrow range of returns for a life settlement fund suggests returns volatility closer to that of fixed income when compared to ASX200’s wide dispersion of returns.

Mr Lee notes that “life settlements as an investment can meet the first requirement of a bedrock investment – its returns are stable and consistent over time.”

The second requirement is that the returns of a bedrock investment should have little or no correlation to the returns of the risky asset. This independence is prized because such assets stabilise a portfolio during periods of poor performance in the risky assets. In Chart 3, the Laureola fund as a representative for life settlements has recorded low levels of correlation with other asset classes. Of note are the low correlations to equities and bonds.

“Low correlations are great but what really matters is what happens when risky assets dive in value. The behaviour we want to see out of bedrock investments is independence during those risky asset drawdown periods,” Mr Lee expounded. With reference to Chart 4, the worst 10 months of ASX200 would have caused an average monthly decline of -7.0% while the Laureola Fund would have produced an average of +0.9% return.

Mr Lee summarises, “We believe that the life settlements exhibit characteristics of a bedrock investment. With the Laureola fund as a representative, an investment in life settlements has stable consistent returns over time and its returns are uncorrelated to a wide range of risky assets. With a bedrock in the portfolio, an investor can liberate his/her portfolio to take on risk. This is especially meaningful navigating the rich but risky platter of opportunities in the post-pandemic investment landscape.”
Non-correlated investments are hard to find …

Many investment strategies claim to be non-correlated to equities or other popular investments. However, such strategies seem to go down together with the general market in a major downturn – the very outcome investors try to avoid. This includes many alternative investments that have failed to provide the non-correlated performance at those distressed times.

… But they do exist

Since its inception in 2013, the Laureola Investment Fund has delivered positive returns in 9 of the 10 worst months for the S&P 500. This avoidance of loss is non-correlation in practice, not just in theory. The fund has provided non-correlation when investors need it. The fund is a “sleep comfortably at night” fixed income alternative that generates returns that can match equity markets.

Notable investors in life settlements include leading US Endowment and Pension Funds (State of Michigan, Alaska Permanent Fund) and Warren Buffett’s Berkshire Hathaway.
Life settlements as an asset are non-correlated to markets

The life settlements sector – providing a form of financing to individuals (usually senior Americans) secured by that person’s life insurance policy – is one of the very few assets that are not impacted by equity market movements.

The Laureola strategy has remained non-correlated in difficult environments. The average annual return since inception has been in double digits and returns are projected to be 8% to 12% per year. The Fund has the potential to generate equity-like performance with a risk profile well below that of equity investments.

By Alex Lee CFA, Director, Investor Relations – Australia and New Zealand

The post Bedrock investments liberate a portfolio’s capacity to take risks in a post-pandemic landscape appeared first on AdviserVoice.

Alex Lee

The struggles of fixed income instruments during the height of the pandemic in March and April 2020 raised questions about the widely accepted notion of negative correlation between bonds and equity.

Without fixed income instruments performing as the safe bedrock of portfolios, investment decision making processes at family offices seized up as markets offered little direction. This then kicked off a scramble amongst asset allocators to find suitable investments to step up as a stable non-correlated returns generator.

Laureola’s portfolio managers see growing commitments by Asian and European family office clients to its life settlements fund. Life settlements funds generate stable non-correlated returns through providing financing to individuals backed by those persons’ life policies.

“We observed life settlements being allocated to the fixed income portion of portfolios rather than in the alternatives portion by our family office clients.

“These sophisticated investors seek stable non-correlated returns in their fixed income portfolio. Non-correlation is important because they want these investments to perform independently of other risky growth assets. This in turn unlocks their ability to take risks in their growth asset allocations. Having that stability in returns cuts through the investment paralysis brought about by the volatile pandemic-era investment landscape,” said Mr Alex Lee, Melbourne-based Director at Laureola.

To that end, Mr Lee said, “The Laureola fund has been running for more than seven years and we have been generating stable non-correlated returns for our global family office clients. These family offices view our fund as a viable complement and, in some cases, a substitute for their fixed income exposure.”

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Alex Lee

“Be like water … If you put water into a cup, it becomes the cup.” – Bruce Lee . While Bruce Lee is a strange source for fixed income strategies, his advice is apt for our low interest rates environment. Paraphrasing – “when rates are low, become the bank.” How so?

Interest rates will continue to stay low. Quantitative easing (“QE”) persists in most parts of the world as governments and their central banks effectively create more money to fight the pandemic and to stimulate economies on life support. In Australia, the flood of stimulus money and RBA’s Cash Target Rate cut to 0.1 percent will also keep the cost of funding low for banks. Banks make money by lending money at a higher rate than the interest they pay on their deposits. Banks will always seek to minimise interest paid as an expense item. Our current environment and the natural inclination of minimising interest paid will keep rates low.

Instead of hoping for larger proportion of loan returns to be shared as an interest paid expense item, investors can look to metaphorically step into the position of the bank and be a lender to earn the interest that banks earn on their loan books. This is done by investing in funds that engage in the type of financing that banks might supply. For example, there are funds which finance SMEs with working capital loans secured by the businesses’ assets, or finance construction loans secured by property.

The obvious risk with the suggestion above is the ability for an investor to effectively access the opportunities and to then manage the assets. Working with a trustworthy and experienced manager is key to mitigating the risks of such a strategy.

We believe Laureola is one such manager with a specialisation in life settlements. Life settlements are resold insurance policies and can be understood as financing to individuals backed by that person’s life insurance policy. Target net returns on a Laureola managed portfolio are 8-12% p.a. and historical monthly returns were positive in 87 months out of 89 months of operations.

Notable investors in the life settlements market include American International Group (AIG) and Warren Buffett’s Berkshire Hathaway.

By Alex Lee, CFA, Director, Investor Relations – Australia and New Zealand

The post Life settlements are resold insurance policies and can be understood as financing to individuals backed by that person’s life insurance policy appeared first on AdviserVoice.

Alex Lee

ESG principles have become mainstream in funds management and the Laureola life settlements fund, now in Australia, is no exception.

“We follow the principles behind ESG in our dealings with insureds who wish to sell us their life insurance policies in the USA. Typically, Laureola and other investors offer a 2-4 times higher payout for a person’s life policy compared to the issuing Life Company,” said Alex Lee, Laureola Advisors.

“How can an investment in life settlements where returns are made when the insured dies be a social good? This must sound contradictory to people outside the insurance industry.

“We believe that the life settlements are a social good because the existence of a secondary market for insurance policies provides insured persons, usually seniors, with more choices in obtaining liquidity. In other words, life settlements give the individual policy owner more control and promotes equality amongst participants in the life insurance industry. With control come the chance for more liquidity options for insured persons,” said Laureola’s Mr Lee.

The US Government seems to agree, as one of the most recent laws is a bill introduced earlier in 2020 (the Senior Health Planning Act) providing better tax incentives for seniors to sell their policies to the life settlement market.

Life settlements provides more liquidity options to insured persons

• A person with a life policy might want liquidity as life circumstances change. This might be especially true for a senior who might have to pay for healthcare in the US. Note that participation in the life settlement market is initiated by the insured. Sale of insurance policies on unrelated parties is illegal.
• In the absence of a secondary market for life policies (i.e. the life settlement market), the insured can either surrender the policy back to the insurance company or let the policy lapse. In both cases, the insured would realise none or a fraction of the death benefit in the policy.
• A life settlement market will give the insured additional options in realising a higher percentage of the face value of the policy. Researchers from London Business School estimated in 2013 that the value unlocked by the life settlement market is about four times greater than that of the surrender value offered by insurance companies.
• The insured obtains a higher cash value for his/her policy. The insured effectively obtained better liquidity terms than otherwise available from the insurance company.
• The life settlement investor continues to pay premiums on the policy until maturity and are then compensated with the full-face value of the policy when it matures (when the insured dies).
• When viewed with such lens, one can see how the life settlement is disrupting the insurance for the good of the insured. The life settlement industry is paying forward the death benefit to the insured while he/she is still alive.

Laureola is a boutique Fund Manager focusing on the asset class of Life Settlements. Our Fund is specifically designed for Private Clients and small to medium sized Family Offices. A well-managed portfolio of Life Settlements will keep its diversification characteristics in difficult times, as the strategy has a very different way of making money – investing in the longevity and mortality markets.

The fund has achieved expected returns of 8% to 12% achieved in every year (except one which was +6.4%). The Laureola Fund delivered a positive return in 86 of 88 months that it has been in operation.

The post ESG principles respected by life settlements industry appeared first on AdviserVoice.

Alex Lee

The question for many about negative correlation is that it works until it does not work. Sadly, everything seems to go down together in a major market downturn – the very outcome investors want to avoid by investing in Alternatives.

As we have seen in major market meltdowns, all asset classes fall in unison. This includes many hedge funds that have failed when they should have prevailed in falling markets because of interest rates, market irrationalities, whatever.

Indeed, Fixed Interest has had falls but the performance of the sector in low inflation/low interest rates has been unspectacular. The current bond market has been described as “return-free risk” by Warren Buffet.

Alternative strategies are often more expensive, less liquid, usually difficult for both the investor and his advisors to understand and typically lose their diversification characteristics in times of stress.

A bleak history of negative returns from supposedly alternative strategies

Investors have regularly been disappointed in “Alternative” strategies as they all become correlated on the way down:

• 1987 – “portfolio insurance” as marketed by the investment banks – Dow down 22.6% on Black Monday (October 19, 1987)
• 1991 -2001 Japan’s lost decade: stock market crash caused by excess debt. Neither the Japanese market nor the economy has fully recovered. The 1991 backdrop in Japan eerily like today’s global backdrop
• 1997 – Asia Crisis – Asian currencies down between 34% and 83% / massive debt defaults – negative impact on other regions
• 2000 – dot-com bubble in the USA – Microsoft stock (then the established tech darling) falls 62% in one day (20 March 2000)
• 2008 – Global Financial crisis – Bubble in sub-prime lending / mis-pricing of risk / caused by too much easy credit
• Nearly all self-proclaimed alternative strategies declined in these periods of stress

Many of the aspects of the backdrops to these crises are present today in the global markets.

Life settlements as an asset are non-correlated to markets

The life settlements sector – buying insurance policies off older Americans who no longer need the coverage – is structurally non-correlated to the share market, the bond market and property price movements.

It’s correlated to people’s life policies not the market.

The fund compares favourably to the S&P 500.

Laureola Life Settlement Fund vs the S&P 500:

• 8-year track record: Since inception April 2013
• $100 invested in Laureola in April 2013 worth $315 on 31 August 2020
• $100 invested in the S&P 500 in April 2013 worth $243 on 31 August 2020
• 26 negative months for the S&P 500; 2 for Laureola
• Arithmetic Total of the 26 monthly returns:  -89% for S&P; +18% for Laureola
• Feb 2020: S&P minus 8.4%; Laureola Fund +0.3%
• March 2020: S&P minus 12.5%; Laureola Fund + 0.3%

Laureola is a boutique Fund Manager focusing on the asset class of Life Settlements. Our Fund is specifically designed for Private Clients and small to medium sized Family Offices. A well-managed portfolio of Life Settlements will keep its diversification characteristics in difficult times, as the strategy has a very different way of making money – investing in the longevity and mortality markets.

The fund has achieved expected returns of 8% to 12% achieved in every year (except one which was +6.4%). The Laureola Fund delivered a positive return in 86 of 88 months that it has been in operation.

By Alex Lee CFA, Director, Investor Relations – Australia and New Zealand

The post Non-correlated assets are hard to find appeared first on AdviserVoice.