How Soros fans can make a name for themselves as canny investors

William Gleeson explains why Lloyd's investment trusts might be worth a punt
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The Independent Online
In the last two months, George Soros, the man who made pounds 1bn out of Britain's exit from the ERM in 1992, has been putting money into Lloyd's of London investment units. If this financial guru thinks Lloyd's is worth a punt, shouldn't the man in the street be looking at the insurance market, too?

Some might say it would take a brave man to have a punt at Lloyd's. Over the last five years the insurance market has reported losses approaching pounds 9bn, blighting the lives of thousands of Lloyd's investors, traditionally known as names.

But all that is changing. In the next few days the market will announce a return to profit of around pounds 1bn. Furthermore, unlike the bad old days, investors are no longer required to take part as sole traders and pledge their entire personal wealth to meet insurance claims. It is now possible to invest in Lloyd's through corporate vehiches which limit your exposure to any trouble in this market.

Even so, Lloyd's offers the punter the excitement of having a dash more than the usual dose of investment risk attached to it. The market is not out of the woods yet. Lloyd's bosses must find a way to meet that significant wedge of past losses which remain unpaid, a problem which arises because several thousand names have refused or are unable to meet their share of these losses.

The outstanding debt runs into billions, but new investors are being "ring-fenced" from its impact. The resolution to Lloyd's old problem is tied up with mind-boggling compensation negotiations to settle the negligence litigation that has been dogging the market for years.

The final strand to securing Lloyd's future is a plan to off-load all the loss-making insurance policies sold by the market prior to 1993 into a new company to be known as Equitas.

Each name would pay a premium to Equitas for taking on these liabilities. Names vote on the total package in July.

So where does this leave the would-be investor? The super-rich might consider joining the "million-pound club" at Lloyd's. These are individuals who want to carry on with the traditional method as names with unlimited liability. This should be more profitable than other methods, but, in the event of a repeat of the disaster years, they will be liable for every penny they own. But they hope, because they are so rich, to weather even the largest of losses.

Those with only a couple hundred thousand to venture can set up a "Nameco" using the traditional Lloyd's professionals. These offer less profit in return for a cap on any losses, up to but not more than the amount invested.

Lloyd's investment trust shares are listed on the stock market. They offer the investor the chance to earn profits twice over without the danger of losing more than you put in. The trust, like any other, makes a return by putting your money in stocks and shares. At CLM, a Lloyd's trust, the funds are placed in an FT-SE 350 index tracker fund. Others, such as Limit (Lloyd's Insurance Market Investment Trust), use discretionary funds.

Profits from these investments should be comparable to those made in similar stock market vehicles but Lloyd's trusts offer the chance of a second income stream because these investments are used as collateral for insurance underwriting by syndicates at Lloyd's If the syndicate makes a profit then the trusts also receive a payout. If there are losses then the investments can be cashed in to pay policyholders.

Patience is required. It takes three and a half years for the first insurance profits to be paid out by Lloyd's, due to the market's three-year accounting rule.

Fifteen trusts have been set up to support underwriting at Lloyd's. Since 1994, when the first trusts were launched, their stock market prices have generally floundered at below the net asset value in their underlying investment. But prices have risen in recent weeks, largely since Mr Soros's interest became known to the stock market. Despite the rises, the small number of analysts who follow the trusts are unanimous in their belief that the trusts are still significantly undervalued.

Nick Bunker, an analyst at ABN Amro Hoare Govett, said: "Prices have gone up because the net asset values of the trusts have increased because the stock market has gone up. There is also increased interest in Lloyd's because the reconstruction deal is almost certain to go through. There has been underwriting profit in 1994 and 1995, at Lloyd's. Most of the trusts are 15 to 20 per cent undervalued."

Jonathan Fell, an analyst at Merrill Lynch, agrees with Mr Bunker's sentiments except for his concern that 1996 will not be such a good year because insurance premium rates have fallen, making the industry less profitable. Nevertheless Lloyd's trusts are a cheap way into this market.

There is an outside risk that if the Lloyd's rescue deal does not go ahead, the pleace could still founder. But, if you believe it's more likely to live on, buying shares in a Lloyd's investment trust is by far the safest way to back your hunch.

George Soros is taking a calculated, and limited, risk with his money.

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