A few days ago trade papersreported that the "Life Settlement Index" has been discontinued by its founder AA Partners Ltd of St Gallen, Switzerland. The article included the following statements;
“AA Partners has discontinued its index comparing the performance of life settlements with two other indexes after a study found that many fund managers inflate the value of the asset.
....Hess said his firm thus concluded that the index contained funds whose net asset values were wrong and didn’t reflect actual performance.”
We have explored the topic of “Indexing” in relation to life settlements many times;
2nd April 2015 Valuation Dilemmas
16th April 2014 Estimating Gross Market Returns for Life Settlements
29th January 2014 A Life Settlements Benchmark/Index: We are not there yet!
13th November 2013 Investing in Life Settlements- Fund Manager Review*
*this article in particular contains the warning, “There is no consistent approach to valuation of life settlement policies.”
We are grateful that common sense has at last prevailed.
Any reader who has been following our discussions for the last few years will be familiar with our position on the in-consistency of indexing or benchmarking in the Life Settlements asset class. The difficulty lies in comparing the performance of funds whose valuation approaches have been so different. This is even before the logic of creating an index out of funds containing non-identical securities is considered.
There is simply no universal, industry wide accepted method of grading life settlement transactions to account for Origination Risks, Legal Risks, Economic Risk (susceptibility to LE Extension) and of course the differences between Secondary and Tertiary market transactions as well as “arms-length vs distressed” transactions.
Hence it remains our view that an “Index” remains a pipe-dream for this industry.
It is an unfortunate reality that many an investor new to this asset has been deceived by “Published Returns” promoted by some so called managers.
We continue to advocate that investors need transparency and uniformity in any promotional material and return information. At the very least, any Investment Manager worth dealing with should be prepared to supply investors (both existing and prospective) with and “Attribution Analysis” of any published returns. In other words an analysis of what components of the fund actually contributed to the return quoted. This will quickly reveal whether the return was from actual cash flows from say policy maturities vs costs and premiums or whether it was simply the contrived assumptions of valuation.
Investors in any new asset would be wise to take counsel from an experienced industry player in order to discern what risks they are willing to accept and to ensure that they are adequately remunerated for accepting those risks. Indexes may well help where there are reasonable comparisons to be made. False comparisons however are extremely unhelpful and may skew investor expectations sufficiently to drive poor decision making.
As always we wish you well in your endeavours in this interesting and valuable asset.
Please feel free to contact us if you have further questions.
Disclaimer: This information is intended for qualifying investors only and was correct at the time of preparation. It has been prepared to provide general information only and should not be considered as a “securities recommendation” or an “invitation to invest” in any jurisdiction. Potential investors should consider the relevance of this information to their particular circumstances. Before proceeding investors must obtain the prospectus and take their own legal and taxation advice. If you acquire or hold one of our products we will receive fees and other benefits as disclosed in the prospectus and relevant offering documents.
 The Deal, Feb 2, 2016 “AA Partners discontinues its life settlement index”.
- A Life Settlements Benchmark/Index: We are not there yet!
- Estimating Gross Market Return for Life Settlements: Are your calculations correct?
- Valuation Dilemmas in Life Settlements
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