Traded life policies may offer downside protection

Life insuranceInvesting in traded US-issued life insurance policies could help generate returns in difficult conditions, because these investments appear to be negatively correlated with equities and bonds in down markets, according to boutique fund manager Managing Partners Limited (MPL).

The firm invests in traded life policies, which are US whole-of-life policies sold before their maturity date by the original owner.

MPL buys traded life policies through a specialised vehicle, the MPL Traded Policies Fund. The fund's institutional share class was negatively correlated with the S&P 500 over the five years to May 2011, said the firm, a period in which equities struggled. However, it is positively correlated over the last one and three years, when equities have performed better.

The firm has observed a similar pattern when the fund is compared with the JPMorgan Global Aggregate Bond Index.

“This data shows categorically that funds that invest in traded life policies can be used to deliver steady, incremental returns of between 8-10% per annum when they are managed in a prudent manner with the right actuarial analysis,” said Jeremy Leach, Managing Director of MPL.

However, many investors are wary of traded life policies, especially after the UK regulator, the Financial Services Authority (FSA), said last year it considers them complicated and risky and identified “major flaws” in the way these investments were marketed.

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