The increasing popularity and attraction of Traded life policies (TLPs) is a double edged sword for unwitting investors, warns the Merlin Stone Report 2010.

The report, penned by Professor Merlin Stone, has found that despite their potential to deliver good returns, as shown by TLPs’ resilience to the financial crisis, the asset class needs to be accessed through carefully selected product providers. Professor Stone believes that an onset of new products in the area could carry high risks.

The Market for traded life policies report, commissioned by boutique fund manager, Managing Partners Limited, has seen assets under management in its traded policies fund rise from $176million in June 2009 to $190million in June 2010.

Stone’s report says that increasing interest in TLPs has been noted from Citibank, BNY Mellon, Credit Suisse, Commerzbank, Deutsche Bank, HSBC and Allied Irish Bank, and he anticipates that boutique product providers will be taken over by larger fund managers seeking to buy into expertise on TLPs.

However, the risks increase with interest. “While the TLP sector could still be seen to be in its infancy, one of the signs of growing maturity is the growing range and sophistication of products that use TLPs as an underlying asset,” explained Professor Stone, visiting professor at Oxford Brookes, De Montfort and Portsmouth Universities. “These include the longevity derivatives linked to indexes based on portfolios of life policies but another, more notable example that has attracted a great deal of publicity – often adverse – is securitisations. Unfortunately, TLPs are still misunderstood, even by institutions. The growing use of securitisations is a concern because of the ways in which they are put together and the motivation for originators to offer them. Investors must scrutinise these securitisations very closely. The horrific fallout from the securitisations of mortgages seen in the US is a clear warning of the risks.”

Stone has recommended a six-point check as a guide to investors on what to look for in TLP products and providers. Investors should avoid higher risk funds that invest in viaticals, contestables or other areas where longevity risk is harder to manage; funds with high charges; funds that charge performance fees; financial products offered by organisations that avoid seeking FSA regulation; funds that do not have critical mass or a reasonable track record; and funds that do not have a good track record in managing currency risk.

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