Bedrock investments liberate a portfolio’s capacity to take risks in a post-pandemic landscape
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 stabilizing 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, unfavorable 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
Source: Laureola, ASX, RBA (as of end Oct 2020)
Using the Laureola fund as a proxy for life settlements, Chart 1 shows the distribution of a life settlement fund’s annualized 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
Source: Laureola, ASX (as of end 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
Source: Laureola
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 stabilize 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
Source: Laureola, ASX (as of end Oct 2020)
“Low correlations are great but what really matters is what happens when risky assets dive in value. The behavior 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.”