Navigating the Markets with Diversified Investments: Why Life Settlements Make Sense
In today's volatile financial landscape, investors are increasingly seeking refuge in alternative investments that can provide stability amidst the unpredictability of traditional markets. With the S&P 500 trading at elevated price-to-earnings (P/E) ratios of 25-27x compared to the historical average of around 17x,(1) and just a handful of stocks driving a significant portion of market gains, portfolio diversification is more crucial than ever. As geopolitical tensions rise and market fundamentals may become overshadowed by speculative policy changes, now is an opportune moment to reassess your portfolio's composition and consider the unique benefits of life settlement investments.
Understanding Current Market Risks
Economic Overvaluation & Market Concentration
The S&P 500 is trading at elevated P/E ratios of 25-27x, compared to the historical average of approximately 17x.(1)
The S&P 500 has achieved 31 record closes followed by 20 for the Nasdaq by mid-year (as of June 18, 2024), raising concerns about the sustainability of these gains.
Overall market breadth is concerning, with 258 stocks trading 20% below their highs, signaling bear market territory in those stocks.(2)
Market gains are highly concentrated. Nvidia alone accounts for 34% of the S&P 500's market cap gains. Meta, Alphabet (Google), Microsoft, and Amazon collectively contribute another 26%. This means nearly two-thirds of the S&P 500 gains for 2024 are driven by these five tech stocks, making the index vulnerable.(3)
Nvidia's market capitalization has single-handedly surpassed the largest European stock markets (Germany, France, and the U.K.) as of June 20, 2024.(4)
Nvidia's recent 3-Day loss exceeds the value of 96% of the S&P 500 (484 companies) as of June 24, 2024.
Geopolitical Uncertainty & Natural Disasters
Ongoing conflicts and geopolitical tensions add layers of risk to global stability.
Energy supply risks from U.S.-Iran tensions and semiconductor supply threats from China-Taiwan relations could impact markets.
Unpredictable events like natural disasters and global pandemics can have significant economic impacts.
Policy-Driven Market Dynamics
Markets are increasingly influenced by Federal Reserve policies rather than solid economic fundamentals.(5)
The risk of policy mistakes, such as significant tax cuts or spending increases, could exacerbate fiscal issues.
Staying the Course: The Power of Long-Term Investing with Help from Alternatives
Staying invested through market ups and downs has historically been a successful strategy. We believe a well-structured, diversified alternative allocation can provide more resilient investment outcomes across different market cycles and prevent unnecessary, costly retreats from the equity markets. This is especially important for investors aiming to preserve and grow their capital over the long term. Alternative investments, such as life settlements, have historically provided portfolio support by contributing returns, reducing volatility, and diversifying overall portfolio exposures, helping investors stay invested for the long term.
The illustration below shows how a diversified alternatives allocation can reduce risk and improve returns, contributing to a more resilient portfolio seeking to weather various market conditions.
This data demonstrates the crucial role of maintaining a long-term perspective, even during periods of market turbulence. In 2022, the financial markets were anything but stable, with unpredictable events causing volatility across asset classes. Amid this backdrop, AIR Asset Management’s multi-strategy approach to longevity and private credit investing has proven to be a compelling investment option, given the strategy’s consistent equity-like annual returns and low volatility compared to traditional markets.
Prior to the pandemic, investors with a healthy dose of equities in their portfolios benefitted from one of the longest, strongest, and steadiest bull markets in modern history. However, the turbulent market swings of 2022 reminded investors of the crucial role a well-diversified portfolio plays in preserving capital and increasing risk-adjusted returns. AIR’s life settlement strategy seeks to deliver on its objective to provide equity-like returns with bond-like volatility in the long-term, offering investors much-needed diversification to weather storms like those seen in 2022.
The Appeal of Life Settlements
Life settlements present a compelling diversification opportunity due to their low correlation with traditional financial markets. By investing in a life settlement strategy, investors gain ownership of individual life insurance policies, a tangible asset that offers intrinsic value similar to real estate. AIR Asset Management's approach seeks stability and the enhancement of long-term returns through strategically pairing these policies with related private credit investments. Our strategy aims to protect against future market fluctuations and maximize the potential for long-term portfolio gains as part of a well-diversified investment portfolio.
Additionally, life settlements not only present a compelling opportunity for investors but also provide significant financial relief to life insurance policyholders. By choosing to invest in life settlements, individuals and institutions can engage in a socially responsible investment that delivers returns while positively impacting the lives of U.S. seniors.
Here’s why we believe life settlements are a compelling investment option:
Non-Correlation with Market Events
The primary driver of returns in life settlements is the mortality of the insured, which is independent of market performance.
Life settlements resemble zero-coupon bonds, where the payout (death benefit) timing is less predictable but not tied to financial markets.
Historical Performance
Life settlements have demonstrated long-term resilience during market downturns, consistently showing a low correlation with equities.
Life settlements have maintained stable returns during the worst-performing months for the S&P 500.
The chart above pulls the S&P 500 Index’s ten most recent down months as of 3/31/24. It does not represent the index's all-time return. To view the historical monthly returns for the S&P 500 Index, visit Ycharts: S&P 500 Monthly Return. See the disclaimer section for important performance information.
Growing Market Opportunities
The life settlement market is expanding, driven by the baby boomer generation's need to fund retirement and healthcare.
Currently, about $30B of life settlements are in force, indicating robust market depth and transaction volume.(6)
Accessing Resilient Life Settlement Investment Strategies with AIR Asset Management
Navigating the complexities of financial markets requires more than just finding safe havens; it demands robust and well-constructed strategies. At AIR Asset Management, we believe our approach is designed to withstand the test of time and market volatility. Here’s how we achieve this:
Historical Performance: Known for our strong track record, we are committed to preserving capital and generating uncorrelated returns.
Proactive Management: Our strategy’s proactive management, strategic sourcing, and continuous evaluation and enhancement of the portfolio underscore our dedication to delivering long-term value to investors.
Bullish Mid to Long-Term Potential: Despite short-term challenges due to a lull in mortality, we remain confident in the mid to long-term potential of the AIR U.S. Life Fund II Strategy, reinforced by anticipated mortality-related cash flows and our strategic asset allocations.
Key Pillars of Our Strategy
Diversified Investments: Ensuring diversification within the life settlements segment and across other related investment sleeves, such as annuities and private credit.
Objective Underwriting: Commitment to consistent and unbiased underwriting practices strengthens our investment decisions.
Strategic Sourcing: Leveraging long-standing relationships provides a distinct advantage in sourcing high-quality investment opportunities.
Annuity and Private Credit Positions: These positions add diversification and income, supporting the strategy’s resilience.
Since our strategy's inception, our multifaceted approach has enabled us to achieve highly competitive, risk-adjusted returns. Over time, this performance has resulted in attractive capital appreciation. For more detailed performance insights, please contact info@airassetmanagement.com.
Conclusion
In an era of market volatility and uncertainty, diversifying your portfolio with life settlements can offer a hedge against traditional market risks. Life settlements are an attractive alternative investment with their low correlation to market movements and potential for stable returns. At AIR Asset Management, we are committed to providing our investors with the expertise and resources needed to navigate these investments successfully. By doing so, we help you build a more resilient and balanced portfolio capable of weathering market turbulence and seizing new opportunities.
Sources
1: Forbes, “Microsoft, Nvidia And Apple’s S&P 500 Dominance Hits Alarming Level,” Jun 18, 2024. Investopedia, “Markets News, June 18, 2024: Nvidia Market Cap Tops Microsoft; S&P 500, Nasdaq Eke Out Record Closes,” June 18, 2024
2. RIA, “Bad Breadth Keeps Getting Worse,” Jun 22, 2024.
3. MarketWatch, “Nvidia’s stock is responsible for a third of the S&P 500’s gains this year,” Jun 3, 2024.
4: MSN, “Nvidia single-handedly surpasses Europe’s biggest stock markets as London Stock Exchange chief promises reform to refresh U.K.’s ‘ambition’,” Jun 21, 2024.
5. Examples: Federal Reserve's Strategic Plan 2024-27, Monetary Policy Report by the Federal Reserve, San Francisco Fed's Economic Letter on Financial Conditions, New York Fed's Examination of Recent Inflation and Policy Responses, and U.S. Bank's Analysis of the Fed's Monetary Policy Focus.
6: © 2023 Conning, Inc. (“Conning”)
Disclosures
This article is provided for guidance and information purposes only. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy. This website and information are not intended to provide investment, tax, or legal advice.
AIR Asset Management (“AIRAM”) is an investment adviser registered with the SEC. The information contained in this email is for general informational purposes only. It should not be construed by any prospective or existing client (or investor) of AIRAM as a solicitation to effect transactions in securities. In addition, the information herein should not be construed by any prospective or existing client (or investor) of AIRAM as personalized investment advice. AIRAM’s personalized investment advice is given only within the context of its contractual agreements with each client. AIRAM’s investment advice may only be rendered after the delivery of its Form ADV-Part 2A/2B and the execution of an agreement by the client and AIRAM.
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