Life settlements show potential for diversifying

Life settlements show potential for added diversification

Russell Investments’ predicts this asset class to grow

Life settlements investments have been identified in new research by Russell Investments as a valuable new asset class for New Zealand’s institutional investors looking to diversify portfolios.

Returns from this asset class are not driven by rises or falls in markets, an attribute desired by large investors for its ability to enhance portfolio diversification, the leading global pension fund adviser says in a paper titled “Life Settlements Investments”.

In the paper Dr Craig Ansley, director of capital markets research at Russell Investments, says a small allocation to life settlements within a well balanced portfolio may provide investors with an effective way to reduce portfolio risk. This is because a life settlement portfolio is composed of life insurance policies which policy holders have sold to life settlement fund managers. The returns from these portfolios are then driven by mortality rates on the policies, returns that do not necessarily correlate with other asset classes.

This non-correlation has resulted in this asset class growing over the past decade from almost nothing to US$12 billion of life insurance settled in 2008, especially in Australia, Europe and the United States. The global financial crisis has provided grounds for further interest, especially by institutional investors with long-term time horizons.

Dr Ansley says life settlements offer a potentially valuable contribution to most balanced portfolios with research showing the asset class is usually priced to yield an expected rate of return of 11% or 12% per annum. He expects the asset class to grow in popularity in the local New Zealand market in the coming year.

“The global financial crisis offered a wake-up call to many investors that despite being diversified, many portfolios were composed of asset classes that were more correlated with each other than was anticipated, which meant that when one asset class fell the others followed,” Dr Ansley says. “Our research shows that life settlements offer healthy returns that are largely unaffected by financial crises and market down turns.”

If you would like to read a full copy of the Russell research paper Life Settlements Investments, please contact Felicity Anderson. Contact details below.

ENDS

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