A new report on the fast-growing Traded Life Policies sector urges investors still smarting from losses in the securitised mortgage market not to repeat old errors by piling into a new area without understanding potential risks.

TLPs are US-issued whole of life policies sold before their maturity date to allow the original policy owners to enjoy some of the benefits during their own lifetimes. The sector received an early boost when HIV patients sold policies early to unlock cash to pay for treatment.

With banking groups such as BNY Mellon, Citibank and Credit Suisse entering the TLP sector, it is easy to see why investors are intrigued by this relatively new form of investment, according to a report by Managing Partners, a firm with a fund holding $190 million of such policies (as measured by gross value).

A report by UK academic Professor Merlin Stone, and commissioned by Managing Partners, showed that seven out of ten life settlement brokers in the US expect to see more products sold on the market in the next five years.

But Professor Stone warns that investors must safeguard themselves against the potential onset of a wave of products carrying high risks, especially those using TLPs within securitisations and those that fail to use the right actuarial investment process.

“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,” Professor Stone said.

“These [products] include the longevity derivatives linked to indices 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,” he said.

MPL’s Traded Policies Fund’s US dollar-denominated Institutional share class returned 66.41 per cent net of all charges over the six years to 30 June 2010, having never delivered a negative return in any single quarter over that period.

By comparison, the AAP Life Settlement Index rose 8.73 per cent through 2007 and 3.99 per cent in 2008, falling by 0.88 per cent in 2009. The fund returned 7.30 per cent in 2007, 9.64 per cent in 2008 and 8.72 per cent in 2009.