Long ReadMar 14 2023

What role can long-term asset funds play in portfolios?

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What role can long-term asset funds play in portfolios?
LTAFs require three month notice periods for redemptions. (Kaique Rocha/Pexels)

The announcement by the Financial Conduct Authority on March 9 of its approval for the first long-term asset fund (LTAF) brings advisers and their clients a new option when constructing portfolios, but what problem does it solve?

The forced suspension of redemptions from physical property funds on multiple occasions over the past decade and the collapse of Neil Woodford’s investment firm, partly as a consequence of liquidity problems, highlighted the issue of holding illiquid, non-stock-market-traded assets in funds that offer clients the chance to redeem their investment at one day’s notice. 

LTAFs will instead require clients to give a minimum three months notice if they wish to sell their holding; individual fund providers can require a longer notice period if they wish, but not one which is shorter. 

FTAdviser understands there are between six and eight applications currently being assessed by the FCA from providers wishing to launch such funds. 

 

In terms of where the demand will come from, Jock Glover, strategic partnerships director at consulting firm Square Mile, says: “Many investment trusts invest in the same sort of assets as LTAFs will, and those offer daily pricing. But the big institutional investors and wealth managers are not able to buy investment trusts for liquidity or risk management reasons.

"Most investment trusts are bought now by retail investors, so they may not be that interested in LTAFs. At the other end of the scale, the very big institutional investors can access private equity funds, and so they may not need LTAFs.

"But in the middle of those are the wealth managers who are too small for private equity, but too big for investment trusts, and the same with some of the pension schemes and ultra high net worth individuals. Those sorts of investors can have a long time horizon and don’t need daily dealing, so the three month notice period is no problem.”

Based on his contacts with some firms that are contemplating bringing LTAFs to market, he says funds investing in private debt and equity, infrastructure and also now renewable energy assets. 

Jason Hollands, a managing director at wealth management firm Evelyn Partners, says that while investment trusts do offer the chance for investors to redeem their holding on a daily basis, in times of market stress one is likely to have to accept a steep discount relative to the underlying net asset value of the assets. 

With this in mind he regards the creation of LTAFs as a "broadly welcome" development and alternative to investment trusts.

Pricing power 

Under FCA regulations, LTAFs must have at least 50 per cent of their assets deployed into unquoted assets, and must produce value for money assessments in the same way regular funds currently do.

But there is also much to be decided, with the regulator still working on the question of how frequently a fund has to publish its net asset value, that is, the value of the assets in a fund.

These types of investment need much more management and active involvement.Russ Taplin, Altus

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