After buying Alternative Asset Opportunities (TLI) almost exactly one year ago I exited my position today at a very small loss (-2.4%). Fundamentally nothing really changed between today and one year ago. What changed was my understanding of the traded life interests. If you start with my oldest post on TLI and read the follow-up posts chronologically you see how with every update I realize that my model of the expected future cash flows needs to be refined, and obviously always in the ‘wrong’ direction. After my latest post on the fund I realized – with the help of a reader, thanks! – that the model was still too optimistic. With my perceived margin of safety evaporating the logical thing to do was selling my position.
I always write that readers should do their own research, and if TLI doesn’t prove the point I don’t know what will. I have compiled a quick list of all the things I missed initially:
- Update, Nov ’12: the average age of the portfolio doesn’t increase with one year/year.
- Update, Nov ’12: the ratio of females and males doesn’t remain constant
- Update, Oct ’13: added assumption that premiums increase 5%/year
- Update, Oct ’13: realization that some policies lapse when holder reaches age of 100
- Update, today: 5% premium increase per year too optimistic, probably 9~10%/year
- Update, today: reducing average age with one year doesn’t increase LE’s with one year
So keep this in mind the next time you read a post on my blog! Especially the last point in the list matters for the valuation. While quite obvious in hind sight I didn’t realize how big the difference was. If you assume that insured group is as healthy as a ‘normal’ 3 year younger group you only add 1 year to their LE. Given that the new LE provider is expecting that the insured group could have a LE that is two years above the previous estimates it’s now easy to see a scenario where you actually start losing money (and given the historical profile of policy maturities it certainly looks like they could be right). TLI simply doesn’t appear to be the opportunity I once thought it was.
No position in TLI.L anymore