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24 May 2017

“The Golden Rules when selecting a fund manager”


By Patrick McAdams; Investment Director, SL Investment Management

In recent years, the FCA (Financial Conduct Authority, formally the FSA)  has shone its search light on life settlement funds; of particular scrutiny, has been the suitability of life settlements as a retail product.  SL has never shied away from engaging directly with the FCA about this issue, supporting its theories from a high ground of having only operated primarily within institutional markets for over a decade. 

In addition, SL has been somewhat vociferous about the need to 'flush out' any life settlement managers that do not apply the strictest policies of good governance and transparency - no coincidence then that SL was at the forefront of ELSA's creation.

As an asset class the benefits of life settlement funds are well documented, but how can investors be sure they select the right fund manager?  A mental check list of Five Golden Rules could be a starting point at the outset of the relationship:             

1. Make sure the manager concerned has proven experience of specialist life settlements fund management.  Life Settlement (LS) funds are unique and require finely tuned expertise.

2. Look into the company's policy valuation methods.  There is currently no consistent, industry-wide methodology, even though the accurate pricing and valuation of policies underpins the long term health of any fund, so dig deep.

3. Find out about the firm's approach to liquidity provision in its funds.  LS funds require carefully calibrated liquidity to meet on-going future premiums and expenses.  Failure to meet these will result in a loss of value, policies will lapse and the long term health of the fund may suffer.

4. Be aware of the firm's mortality and longevity processes; a manager worth its salt will have a strong in-house team of actuaries that apply state of the art models to predicting mortality and a policy on how frequently life expectancies are updated.  This should be on a rolling basis to reflect actual mortality experience across a whole portfolio - not simply a one-off calculation at the outset of the fund; and life expectancies should be updated at least every 2 years for more accurate valuation.  

5. Finally, ask yourself; does the fund manager have the integrity to go the distance?  This may sound like a nebulous and open-ended question, but establishing the firm's approach to corporate governance and transparency on remuneration and fee structure is a worthwhile exercise.  In addition, find out if the firm is a member of European Life Settlements Association (ELSA), and where the manager and/or firm are regulated. 

By applying this check list at the start of the relationship, investors can be confident that they have picked a good solid fund manager for the long term.