Issue 12 2020

CEO MONTHLY / ISSUE 12 2020 9 , Companies Show Their True Mettle in Testing Times Words by Jeremy Leach, Chief Executive Officer, Managing Partners Group, and Life Settlements CEO of the Year. Difficult times test the mettle of a company and its proposition. Unfortunately, the economic downturn seen in 2020 – the sharpest since the great depression – has tested many companies to destruction and will no doubt claim many more in the New Year. So to be awarded Life Settlements Chief Executive Officer of the Year in such adverse times is a gratifying honour. There are several reasons for the resilience of Managing Partners Group. The first is our adaptability. For a business with offices in four countries, the challenges of co-ordinating our operations and ensuring the safety and well-being of employees during lockdown has been considerable. Most of our staff have spent extended periods working from home and I am grateful for the ways in which they have adjusted to this new working environment while still embracing a strong team spirit. Steady, incremental returns Another key reason for MPG’s resilience is the asset class at the heart of our proposition and in which we are a global leader – life settlements. Life settlements are US-issued life insurance policies that have been sold by the original owner at a discount to their future maturity value and are institutionally traded through a highly regulated secondary market. Their key attraction is that they have a very low correlation with equities and bonds because returns are largely driven by life expectancy estimates and other demand/ supply factors unrelated to financial markets. When managed correctly and prudently, a fund that invests in this asset class can deliver steady, incremental returns year in, year out. And that is why we expect the asset class to be in high demand next year as investors seek alternatives to fully priced bonds and the volatility of equities. The life settlement market has been growing strongly since 2016. We anticipate that the face value of new policies coming onto the market will have increased by 10% in 2020 to $4.6bn and this will rise to $5bn in 2021.(1) This will still be some way below the peak of $12.2bn seen in 2007 so there is potential for much more growth. The asset class is seeing increasing interest from institutional investors and wealth managers in the US, Europe – especially Switzerland - and Asia. The inquiries we are receiving from investors has increased dramatically this year, especially from asset managers that are looking to diversify from core asset classes to preserve value and increase balance in their client portfolios, and to identify alternatives that have the potential to deliver more reliable future capital growth. And life settlements offer extremely good value. MPG’s analysis(2) shows their prices currently reflect high Internal Rates of Return of around 13% because of the discounts at which they can be purchased versus their fixed maturity values. The High Protection Fund MPG’s flagship product is the High Protection Fund, which aims to deliver long-term capital growth of between 8-9% per annum by investing in a portfolio of life settlements. Its USD Growth share class returned 0.77% and 9.96% after charges in the month and year to the end of October respectively. It has delivered an annualised return of 12.53% since its launch in July 2009. The volatility of the Fund has been extremely low. A key factor in this is the quality and diversification of the assets it holds. The credit ratings of the underlying insurers who have issued the policies are strong: the average rating is very high at AA. The spread of issuers is also broad, across as many investment grade counterparties as achievable. The management team has been adept at sourcing good buying opportunities through its extensive contact network while also ensuring a spread of maturity ranges to optimise investment returns and maintaining longer-term liquidity and sufficient cash reserves. A shrewd and rigorous approach MPG sees several key drivers of growth in the life settlement market. The regulatory environment is established and supportive, and an increasing number of policies are coming to market, both from baby boomers seeking ways to pay for retirement or care or those who have found themselves in difficulties because of the current economic woes. But with the uncertainties around COVID’s ultimate impact and interest rates at all-time lows, investors are increasingly turning to life settlements because of the high and steady returns they offer - especially via funds run by a manager with a shrewd and rigorous approach to managing money through good times and bad. 1) Source: MPG analysis of industry data/Conning, Life Settlements: The COVID-19 Impact on Life Settlements, October 2020. The face value of new life settlements was estimated at $4.2bn in 2019; $3.8bn in 2018; $2.5bn in 2017; and $2.1bn in 2016. The face value of in-force life settlements was estimated at $21.6bn in 2019. (2) Source: MPG analysis of AAP Life Settlement Market Update, 2020 Company details: Managing Partners Group Web Address: Jun20067