The stable core of a portfolio consists of ‘bedrock investments’. Their role is to generate stable, consistent returns over time. Ideally, the returns are not correlated to the returns of the risky asset. With this stabilising force, the portfolio can then take greater levels of risk in its growth asset allocation.
Traditionally, fixed income instruments have played this role. Bonds provide the stability and consistency to preserve a portfolio’s returns while the riskier equities hunt for higher returns. However, unfavourable changes in correlation between equities and bonds over time nudged investors to evaluate the suitability of other potential bedrock investments.
“We suggest investing in life settlement as a strong bedrock candidate on the basis of the following historically observed attributes,” stated Alex Lee, Laureola Advisors Inc’s Director of Investor Relations, Australia/New Zealand.
Chart 1: Distribution of Annualised Returns over 3-year Period from May 2013 to Oct 2020
Using the Laureola fund as a proxy for life settlements, Chart 1 shows the distribution of a life settlement fund’s annualised returns over multiple 3-year periods. The fund’s returns tend to be higher than that of the ASX200 Index and 3-year bank term deposit rates since May 2013. This highlights the consistency of performance (and potential outperformance over equities) over a 3-year timeframe.
Chart 2: Distribution of Monthly Returns from May 2013 to Oct 2020
Chart 2 highlights the stability of monthly returns. The narrow range of returns for a life settlement fund suggests returns volatility closer to that of fixed income when compared to ASX200’s wide dispersion of returns.
Mr Lee notes that “life settlements as an investment can meet the first requirement of a bedrock investment – its returns are stable and consistent over time.”
Chart 3: Correlation of Laureola Fund to Major Asset Classes from May 2013 to Oct 2020
The second requirement is that the returns of a bedrock investment should have little or no correlation to the returns of the risky asset. This independence is prized because such assets stabilise a portfolio during periods of poor performance in the risky assets. In Chart 3, the Laureola fund as a representative for life settlements has recorded low levels of correlation with other asset classes. Of note are the low correlations to equities and bonds.
Chart 4: Performance of Laureola Fund vs ASX 200 in worst 10 months for ASX 200
“Low correlations are great but what really matters is what happens when risky assets dive in value. The behaviour we want to see out of bedrock investments is independence during those risky asset drawdown periods,” Mr Lee expounded. With reference to Chart 4, the worst 10 months of ASX200 would have caused an average monthly decline of -7.0% while the Laureola Fund would have produced an average of +0.9% return.
Mr Lee summarises, “We believe that the life settlements exhibit characteristics of a bedrock investment. With the Laureola fund as a representative, an investment in life settlements has stable consistent returns over time and its returns are uncorrelated to a wide range of risky assets. With a bedrock in the portfolio, an investor can liberate his/her portfolio to take on risk. This is especially meaningful navigating the rich but risky platter of opportunities in the post-pandemic investment landscape.”
Non-correlated investments are hard to find…
Many investment strategies claim to be non-correlated to equities or other popular investments. However, such strategies seem to go down together with the general market in a major downturn – the very outcome investors try to avoid. This includes many alternative investments that have failed to provide the non-correlated performance at those distressed times.
… But they do exist
Since its inception in 2013, the Laureola Investment Fund has delivered positive returns in 9 of the 10 worst months for the S&P 500. This avoidance of loss is non-correlation in practice, not just in theory. The fund has provided non-correlation when investors need it. The fund is a “sleep comfortably at night” fixed income alternative that generates returns that can match equity markets.
Notable investors in life settlements include leading US Endowment and Pension Funds (State of Michigan, Alaska Permanent Fund) and Warren Buffett’s Berkshire Hathaway.
Life settlements as an asset are non-correlated to markets
The life settlements sector – providing a form of financing to individuals (usually senior Americans) secured by that person’s life insurance policy – is one of the very few assets that are not impacted by equity market movements.
The Laureola strategy has remained non-correlated in difficult environments. The average annual return since inception has been in double digits and returns are projected to be 8% to 12% per year. The Fund has the potential to generate equity-like performance with a risk profile well below that of equity investments.
Alex Lee CFA
Director, Investor Relations – Australia and New Zealand
Laureola Advisors Inc.
Email: alee@laureolaadvisors.com
Laureola Advisors
Tony Bremness is based in Europe and can be contacted at Tony.Bremness@laureolaadvisors.com