More than 5,000 investors who moved money from AIG Life’s Enhanced fund to its protected recovery fund are likely to see their maximum returns “greatly reduced” if interest rates remain low.
AIG’s £5.5bn Enhanced fund closed last September after it suffered a run of redemptions in the wake of the Lehman Brothers collapse and the bail-out of AIG. At the time, investors were able to liquidate only 50 per cent of their holdings, but AIG guaranteed they would receive the rest in three years, if they kept their money invested.
Policyholders were given the option of either transferring their remaining holdings to the protected recovery fund or, if they insisted on withdrawing their money, receiving only a reduced amount – equivalent to 73 per cent to the Enhanced fund’s holdings in mid-December. As a result, about 95 per cent of investors chose to transfer half their assets into the protected recovery fund.
But in a newsletter sent to investors this month, AIG Life warned investors about the protected recovery fund’s shortfalls.
“The low interest rate environment we now find ourselves in does present some challenges to the protected recovery fund,” the newsletter stated. “The first is that the coupons received by the fund will be much lower and this means that the maximum returns from the fund will be greatly reduced if interest rates remain at current levels.”
“Also, with poor returns available on fixed-interest investments, we will now need to invest a much higher proportion of the funds liquidity until the fund maturity date to ensure that the guarantees can be achieved,” it continued. “This, in turn, has a knock-on effect to the distributions and will mean that we will have much less to distribute prior to maturity on 1 July 2012 – it could mean that distributions are modest or possibly nil, although the actual amount we distribute will depend on a number of factors including future interest rates, default rates, withdrawals and market valuations.”
This news comes as a setback to those affected as it means the chances are higher that they will be locked in the fund until its maturity in July of 2012.
AIG Life’s Enhanced fund had been popular with wealthy investors in the UK, and financial advisers estimate that about two-thirds of the fund was sold through UK private banking operations, including those of Barclays, Lloyds TSB, UBS, Credit Suisse and Coutts, which is owned by Royal Bank of Scotland.
