David Rawson-Mackenzie, Centurion Fund Managers: “Structured longevity is a viable option for investors wishing to reduce volatility, manage risk and increase diversification”
David Rawson-Mackenzie (pictured), founder of longevity investment product specialist Centurion Fund Managers, says the launch of the Centurion Global Population Index Structured Note was prompted by research indicating that many investors needed to generate income from their portfolios, wanted long-term investments with low market correlation, and identified preserving wealth as their main aim.
GFM: What is the history and background of your company, principals and products?
DR-M: I set up Centurion Fund Managers in 1999 as an asset management company specialising in longevity alternative investments, including life settlements and longevity derivatives. The company is domiciled in the Cayman Islands and is one of the first fund managers to focus exclusively on investing in longevity.
Centurion Fund Managers is part of Centurion Group, which I founded in 1995. We have offices in the UK, Luxembourg and Mauritius and a 16-year proven track record of providing investment, trust and corporate services to private clients throughout Europe and Latin America. Before setting up Centurion, I gained a wide experience of the private client market and the offshore financial services industry working for Bank of Bermuda in Bermuda, the Isle of Man and the Cayman Islands.
The Centurion team also includes our investment and risk assessment adviser, Pollyanna Wan, and Eva-Marie Müller Stüler, who heads our asset management team.
Our aim is to be market leaders in longevity and to develop innovative products in response to changing market needs. We spearheaded the use of synthetic products and are currently the only longevity fund manager to offer synthetic as well as physical policies in our portfolio. We were also the first in the market to launch a longevity fund that invests in a combination of macro and micro longevity.
Since launching the Defined Return Fund 10 years ago, we set up the Life Settlement Strategy Fund in 2006, followed by a range of other market-leading investment products that combine macro and micro longevity strategies. Today we manage more than USD400m in client assets.
GFM: What is the structure of your new product?
DR-M: The Centurion Global Population Index Structured Note is a five-year index-linked note offering a fixed annual coupon of 5 per cent, starting from the second year, as well as a bonus at maturity based on performance of the index. It is the first offering under Centurion’s Principal Protection Longevity Index Note series.
The GPI Structured Note offers an achievable steady annual return of 5 per cent (from the second year) that would benefit most investment portfolios by diversifying away from high exposures to equities, bonds and commodities, an issue highlighted by Centurion’s own global market research.
The product has been launched in Europe and Asia and has attracted a lot of interest from financial advisers, wealth managers, family offices and private banks in both regions because it is ideally suited to investors looking for defined returns, genuine portfolio diversification and low correlation to traditional markets.
Following investment in the GPI Structured Note, the issuer and the independent safe custody agent will provide finance to a creditworthy borrower able to provide quoted and/or unquoted assets as collateral. Collateral is valued independently and regularly by a valuation agent, and is held by an independent trustee for the duration of the finance agreement.
The bonus is dependent on the performance of a Global Population Index, which reflects the actual to expected mortality experience of people aged over 65 in a pool of selected countries in Europe, North America and Australasia. The data to build the index comes from measurable and independent government sources.
If the actual mortality of the Global Population Index is higher than expected, so is the potential return to investors. If mortality is lower than expected, the initial investment is still protected. The range of returns could be between 3.9 per cent and 6.9 per cent depending on the actual-to-expected mortality experience of countries within the Global Population Index.
GFM: Who are your main service providers?
DR-M: The independent safe custody agent to trustees is Barclays Bank, the independent longevity valuation agent is Lewis & Ellis, and the independent collateral trustee is Cogent, which is licensed by the Guernsey Financial Services Commission. The index data source is AA-Partners and the issuer is Centurion Structured Solutions SPC.
The auditor is BDO International and our Cayman legal adviser is Campbells. The registrar and global agent is Argyll Management Services, while the risk management adviser is Centurion Portfolio Managers, which is authorised and regulated by the Financial Services Authority in the UK.
GFM: How was your product conceived?
DR-M: Before developing the GPI Structured Note, which is aimed at the high net worth investor, we surveyed more than 1,000 investment professionals from diverse backgrounds – wealth managers, financial advisers, family offices, private banks, consultants and brokers – about the investment challenges facing their clients and the asset classes, products and wrappers they are likely to consider.
What was particularly interesting from the data collected was that while 52 per cent of investors said they wanted to learn more about longevity investments, the major reason they had not done so to date was lack of time to research the asset class properly.
It made sense, too, to bring the product to market in a format that is relevant to investors, and our research showed us that 38 per cent of investors favoured structured notes. In addition, 46 per cent needed to generate income from their portfolios, 45 per cent wanted long-term investments with low market correlation, and 60 per cent said their main aim was preserving wealth. This intelligence illustrated the kind of product required by the market.
Our experience told us we could deliver it in the shape of a longevity finance product, something we first pioneered in 2008. It was aimed at providing high net worth individuals with a bond-like investment delivering low-risk returns with an upside linked to the profit participation of the product it was financing.
The Diversified Bond Strategy, as it became known, focused on financing properties subject to a tenancy contract. The interest rate paid to investors was linked to the property becoming vacant and then sold. The security for the financing was a charge on the portfolio of properties with a significantly higher value than the loans made, providing a high level of security to the structure.
With initial predicted returns of 5 per cent, by linking the interest to longevity, the return has to date outperformed by almost 20 per cent, yielding a 5.9 per cent APR since launch, with anticipated yields at the end of the five-year term exceeding 6.25 per cent. The enhanced returns came from linking the bonus to the profit made every time the borrower disposed of an underlying property.
Our four years of experience in managing the Diversified Bond Strategy provided the expertise and knowledge to devise the GPI Structured Note as part of what we intend to be one of the larger longevity product ranges in the market.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
DR-M: From an existing business perspective we have seen no increase in redemptions or requests to call out as a result of the financial climate. Business in our open funds remains healthy, and we are optimistic for the future of our new products.
Our strategy has always been to achieve a more balanced approach by developing our business internationally and taking advantage of opportunities in new and emerging markets as they arise. One such example is Asia, where we are already having some success in signing up new distributors.
GFM: Please describe your investment process and how your product works.
DR-M: The objective of the GPI Structured Note is to provide investors with access to the longevity markets through investments in longevity assets and asset-backed notes whose returns are linked to longevity. The notes’ issuer, Centurion Structured Solutions, will be investing in a range of longevity-linked products including longevity indices, longevity-indexed notes, longevity swaps and liquidity instruments.
Centurion Portfolio Managers, our FSA-regulated company, is the investment and risk assessment adviser and provides advice to the issuer on investment matters and risks relating to investment opportunities including identifying, evaluating, and monitoring risks associated with existing investments and potential investments. To provide an additional layer of accountability and risk management we have appointed an independent advisory board composed of experts in financial regulation, longevity risk analysis and risk management to provide market, technical and asset specific input and advice.
Once the investment decisions have been made, the actual structuring and sourcing of the various longevity products is the responsibility of our experienced in-house asset management team.
GFM: What is your approach to managing risk?
DR-M: Longevity, like any other investment, is not without risk. With more than 10 years of experience in developing and running a range of different longevity products, we have built up an in-depth understanding of the inherent risks associated with the asset class and put in place a proactive risk management policy with robust processes and practices to mitigate these risks and enhance the level of security for our investors.
For example, using a mark-to-market valuation technique helps us to mitigate liquidity risk. Assets are valued at current market value, which enables us to trade them back into the market if and when liquidity is required and also means we are not relying on new subscriptions to provide liquidity, which in itself is a high-risk strategy.
A mark-to-market approach also provides a better indication to prospective investors and their advisers of the risks associated with longevity, as a true and relevant value will be reflected in the monthly share price. Investors will no longer witness a share price that ticks up at the same rate month-on-month, based on a model discount rate and policy maturities, but observe a price driven ultimately by longevity but subject to market price.
GFM: What developments do you expect in your investment sector in the coming year?
DR-M: We are already seeing the longevity asset class move toward a more market-led strategy, mainly in response to an investor shift toward greater emphasis on liquidity and shorter investment horizons. This means that finally, an established and active market exists for longevity instruments.
The emergence of a new generation of longevity investments is also crystallising. The GPI Structured Note is just one example of this development, and we expect the longevity market profile to change over the next few years as more such investment products enter the market.
We think that the longevity industry will continue its drive toward greater transparency and more effective regulation.
GFM: How will these developments affect your firm?
DR-M: We anticipated the move toward a more market-led longevity industry last year when we changed our valuation technique from mark-to-model to mark-to-market, so in that respect we are ahead of the curve. Similarly, we like to think that launching the market’s first longevity-linked note is spearheading the continual evolution of the longevity asset class.
We have always firmly believed that longevity as an asset class should be transparent and founded on good corporate governance. We aim to ensure we adhere to the principles of good corporate governance by developing and implementing a transparent and accountable structure for all our investment products, not just the GPI Structured Note.
GFM: What do investors currently expect from managers?
DR-M: Talking with our distributors, their clients’ main concern is wealth preservation and consistent returns. Our response has been to develop this new series of longevity-linked notes to provide investors with a high level of security and a clear expectation of return. In the current economic climate, we believe that structured longevity is a viable option for investors wishing to reduce volatility, manage risk and increase diversification.
GFM: What differentiates you from other managers in your sector?
DR-M: Our experience! We were the first to develop and launch a longevity fund back in 2002, so we are the longest running longevity asset managers in the business. This means we have built up in-depth industry knowledge and expertise, including how longevity products can work and the pitfalls to avoid. We are committed to developing innovative products that meet investors’ ever-changing needs, including the pioneering use of synthetics to provide greater liquidity and flexibility.
GFM: How do you view the environment for fundraising over the coming 12 months?
DR-M: We remain positive. Asia, in particular is proving to be very exciting – there is a real appetite for investment products producing consistent returns with low volatility, so longevity is an ideal fit.
GFM: How do you expect your business to be affected by current and proposed regulatory changes?
DR-M: The Financial Services Authority in the UK recently stated that life settlements are high-risk products that should not be promoted to the vast majority of retail investors in the UK, and the regulator intends to publish proposals soon to prevent them being promoted to retail investors. This will not directly affect our business, as we do not distribute within the UK, nor to retail investors. Longevity products are only suitable for sophisticated investors that fully understand the risks inherent in alternative asset classes, not just longevity.
GFM: Do you have any firm plans for further product launches?
DR-M: In July we are launching our Property Index Note, which is linked to a market-correlated property index and offers investors higher returns with reduced volatility. In addition, the GPI Structured Note is the first tranche in a series, so there will be further tranches throughout the year.
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