The 50-basis point cut in the Federal Funds rate decided by the US Federal Reserve on Tuesday is boosting the returns of sterling and euro-denominated funds that invest in US assets if they hedge their currency exposure, according to Managing Partners, a Cayman Islands-based fund management group that invests in traded life policies.
MPL announced last June that diverging UK and US interest rates were creating a golden opportunity for managers of sterling- and euro-denominated funds to enhance returns with hedging plays. US rates are likely to decline further, the firm says, while euro and sterling rates are set to stay stable or possibly rise.
Sterling and euro funds hedge by first placing sterling or euros on deposit and borrowing in the foreign currency to purchase the investments. A forward cash swap is then purchased for a later date.
If for example, US and UK interest rates are at parity, then no gain is made on the interest rate differential. But if UK rates rise and US rates fall, then the differential enhances returns for a neutrally-hedged fund. This means that each time UK interest rates rise, hedged sterling funds will see a gain of the same amount.
'The core underlying asset of our funds - traded life policies - are US assets, and a passive currency hedge is in place to create linear growth in sterling,' says MPL managing director Jeremy Leach.
The currency hedge favours higher sterling interest rates because the share class makes a currency profit when UK interest rates are higher than US rates. The recent interest rate rises implemented by the Bank of England were positive for the share class, and the US rate cut will also prompt higher returns for the fund.'
Leach argues that both institutional and retail investors looking for steady, predictable returns should consider investing in traded life policies, US-issued life assurance policies sold before the maturity date to allow the original owner to enjoy some of the benefits during their lifetime.
TLPs are purchased at a discount from their maturity value, which in the majority of cases is fixed at outset, which means that they are guaranteed to rise in value. The TLP market has seen huge growth from USD50m in 1990 to USD20bn in 2006.
While it is unknown when the assured lives will die, which is a risk, the key attraction of a TLP fund is that with the right diversification and actuarial analysis, they can be used to deliver steady, predictable returns. The returns, currently running at around 8-10 per cent, are uncorrelated to equities, bonds or property, so offer a safe haven for investors amid the current volatility in the markets.
MPL offers retail investors the Corinthian growth fund, a fully regulated Cayman mutual fund that can be included in personal portfolio bonds, wraps and UK self-invested personal pensions. The fund offers a two times leverage facility to enhance returns. The fund has no initial charge and a 103 per cent allocation rate. The annual management charge is 1 per cent. It has an annual growth target of 7 to 9 per cent, net of all charges.
Corinthian offers an enhanced growth share class designed for investors looking to transfer assets from funds that have failed to deliver on expectations, such as with-profits investments, and which benefit from an initial boost to the investment.
For institutional investors, MPL offers Traded Policies, another Cayman-regulated fund with sterling, dollar and euro share classes. Sterling growth share classes are also offered to private investors.
MPL is a multi-discipline investment company that specialises in managing alternative asset classes for institutions and sophisticated investors. It is a market leader in managing funds that invest in TLPs, and manages collective investment schemes and regulated mutual funds with total assets in excess of USD100m.