In all asset classes, both Investors and Managers alike, look where possible to have access to and industry wide benchmark/index to assess performance and compare themselves with their peers. Clearly this is a good thing when available.
The trap for the uninformed or novice investor is to distinguish between true benchmarking and the marketing “Spin”.
For instance it is at best unhelpful and at worst dangerous, to assume a higher headline return is better than a lower return unadjusted for relative risk. Clients need to have some knowledge or appreciation of the risk return trade-off in any transaction and be confident that they have fully taken account of known risks to make a valid comparison. Many an investor, new to the game, has unwittingly taken on risks disproportionate to their appetite or missed value opportunities, through simple lack of knowledge.
In property it is clearly inappropriate to compare the headline gross return advertised on a highly speculative property development perhaps touted by an at best inexperience manager, to say a highly diversified listed property trust specialising in “A” grade commercial properties in large Capital cities that is managed by a well-respected “Household Name” Manager.
Similar in the Equities field it would be inappropriate to assume the returns on a “Long Only” Large Cap Fund, should be comparable to a Long/Short Strategy, or to a single sector specialist fund in say emerging markets or small Cap stocks.
The Life Settlement Asset class is no different.
In a perfect world where all life insurance policies in the life settlements market were identical, a Life Settlement Index would provide an enormous assistance to investors and enable them to benchmark and clearly evaluate life settlements funds. However, this isn’t a perfect world and not all life insurance policies are identical because not all human beings are identical. In addition, not all life policies have been originated in the same manner.
If you wish to learn more about the difficulties in constructing an index/benchmark for life settlements we will be more than happy to discuss this technical subject with you.
As always we wish you well with your life settlement investment opportunities and if you want to learn more about investing in this asset class please contact us.