'I’m failing to see the point': Industry questions effectiveness of FCA's new Ltafs

Laith Khalaf, head of investment analysis at AJ Bell, said the Chancellor should “brace himself for disappointment” when the Ltaf launches in mid November.

He said the Ltaf has been launched so pension funds can direct their capital to the UK’s economic recovery, but the FCA “can’t and won’t” limit the investment scope of such funds to the UK.

“Ltafs will probably prove to be a bit of a damp squib for British business therefore, given that the prevailing investment appetite is predominantly for overseas assets, so the Chancellor should brace himself for disappointment over the scale of fresh pension capital that will be directed to building back better in the UK.”

The FCA is to launch the open-ended investment fund structure on November 15 to give investors access to infrastructure and private equity investments.

It is aimed at sophisticated investors and defined contribution (DC) pension schemes, but the regulator said it will consult next year on widening the distribution of the Ltaf to certain retail investors.

The fund structure comes with monthly redemptions and a notice period of at least 90 days. Though the FCA said in many cases this will be longer. 

Khalaf said it was unlikely there would be significant demand for LTAFs from retail investors. “The prospect of waiting 90 days to get your money out of one of these funds, at an unknown price, won’t exactly draw baying crowds, particularly within funds and model portfolios which are regularly rebalanced as a matter of course," he said. 

For those investors who want to ensure a fund manager is not forced either to sell or to buy shares depending on whether they are attracting or losing investors, the investment trust structure is still the only option.Kyle Caldwell

Steven Cameron, Aegon’s pensions director, agreed there was unlikely to be an “overnight rush” in investment as members of DC pension schemes now expect their pension funds to be priced daily, as well as being able to switch or access funds without any delay. Though he welcomed the new fund structure overall.

He said: “Arrangements for arriving at a daily price between Ltaf valuation points to feed into the default fund price will all be critical. 

“Schemes will also need to explore how to manage liquidity within the default fund, when the proportion in the Ltaf is not readily realisable. 

"This will in turn require detailed scenario planning including for extreme events and a full understanding of regulatory and capital requirements.”

Ben Yearsley, investment consultant at Fairview Investing, said he could not see the point of the Ltaf.

“They’re only available for high net worth individuals or sophisticated professionals.

"Well, you can have monthly dealing funds that do that already, you’ve got illiquid funds already i.e. property, and you’ve got investment trusts.

“I’m failing to see the point [of the Ltaf].”

Kyle Caldwell, collectives specialist at Interactive Investor, said on the one hand the idea was sensible as the new structure protected investors from a ‘run’ on the fund, but he added it was hard to see how it would get around the shortcomings of the open-ended fund structure for investing in illiquid assets.

“The LTAF seems to offer investors some sort of halfway house between open-ended funds in their current form and an investment trust, as they are seeking to limit daily withdrawals, but without putting a limit on how much can be invested on a daily basis,” he said.

“For those investors who want to ensure a fund manager is not forced either to sell or to buy shares depending on whether they are attracting or losing investors, the investment trust structure is still the only option.”

For this to succeed investors need to be very clear on what they are invested in, what they are paying and what their rights are when it comes to issues such as redemptions and dealing – getting this right is vital to building confidence in Ltafs and making them a mainstream part of the defined contribution landscape in the future.Helen Morrissey

Richard Stone, chief executive of the Association of Investment Companies, said there was a concern over whether the minimum 90-day notice period for redemptions will be enough. Though the FCA has said it expects this to be longer in most cases. 

“If too short, this could threaten the long-term resilience of the LTAF," he said.

"It will be a challenge for managers to set adequate notice periods, especially if the structure also incorporates leverage. 

“It is difficult to see how investors can be assured there won’t be a run on an LTAF’s liquidity when market sentiment turns negative."

However, Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, was more supportive of the product, saying investing in illiquid assets offered an opportunity for investors to boost their pension pots. But she warned clarity on price was needed.

“For this to succeed investors need to be very clear on what they are invested in, what they are paying and what their rights are when it comes to issues such as redemptions and dealing – getting this right is vital to building confidence in Ltafs and making them a mainstream part of the defined contribution landscape in the future.”

She added widening the Ltaf to other retail investors was welcome, but warned the FCA had to take the time to get this right.

She said: “We believe there would be significant interest among certain individual investors but again it is important they understand exactly what it is they are buying and the role it plays in their overall investment planning.”

Independent consultant John Forbes said the next step forward in the Ltaf development was very welcome, "particularly the confirmation that this is moving forward rapidly with confirmation that the rules and guidance will come into force on November 15.

“Whilst it does not deliver everything we might want as an industry, it is a big step forward to enabling more investment by defined contribution pension schemes.”

sally.hickey@ft.com