Hunt for Income  

Long-term asset fund: A solution to the income dearth?

Long-term asset fund: A solution to the income dearth?

The creation of a long-term asset fund could help investors in their hunt for income, according to the Investment Association.

Miranda Seath, head of market insight at the trade body, told FTAdviser that long-term asset funds — with their less frequent dealing periods and wider investment powers — could help provide investors with access to sectors which were an “important source of income”.

She said: “Investors looking for income have faced challenging conditions in 2020. Dividends, a crucial driver of the FTSE’s total return, have been slashed or suspended and the longer-term outlook is at best uncertain.

“Property fund suspensions, caused by valuation uncertainty in 2020 rather than liquidity challenges, have also hampered the search for income. 

“Bond yields continue to be low and whilst the consistent inflows post-March are partly due to a recovery from outflows, they are also a sign that bonds are the most accessible source of income to investors.”

But other asset classes which could also provide a hefty source of income for investors are sometimes not easily accessible.

Ms Seath said: “As we look ahead, there is a widening debate on the best way to access asset classes such as infrastructure and private credit, which could provide an important source of income as well as total return for those with long-investment horizons.

“[These] are not currently easily accessible to retail or DC pension investors.

“A vehicle such as the long-term asset fund would offer less frequent dealing periods and have wider investment powers than traditional funds.”

First proposed by the IA in June 2019, the long-term asset fund would not allow investors to access their cash at a day’s notice, as is the case with other funds in the IA universe, and instead will offer less regular liquidity.

The aim is for the fund structure to allow investors to put their cash into areas such as infrastructure and renewable energy and have access to an open-ended fund structure. Such assets are currently typically held in closed-ended investment trusts.

In November, chancellor Rishi Sunak pledged to launch the UK’s first long-term asset fund to encourage pension funds to funnel capital towards the UK’s economic recovery.

The issue of liquidity within the open-ended fund structure has been brought to light a number of times in the past few years, most notably by the Neil Woodford saga which saw one of the UK’s most popular funds close its doors due to the fund manager’s propensity to invest in illiquid assets.

It is also a problem for property funds, which have been forced to suspend on a number of occasions when the assets within the portfolios could not be sold quickly enough to meet redemptions.

The regulator has proposed mandating an 180-day redemption period for open-ended property funds to move some way to solving this “liquidity mismatch”.

imogen.tew@ft.com