- FCA has outlined its new regime for investment in illiquid assets (Long Term Asset Funds)
- LTAFs will be able to invest overseas as well as in the UK, so the Chancellor will probably be disappointed with the British business boost
- Retail investor demand for LTAFs is likely to be weak
- Still no word on the new rules for open-ended property funds
Laith Khalaf, head of Investment Analysis at AJ Bell, comments:
“Last year the Chancellor committed to launching Long Term Asset Funds so that pension funds could direct their capital towards the UK’s economic recovery. The FCA has now duly delivered a regulatory regime to permit LTAFs investing in illiquid assets to be set up and sold to professional and sophisticated investors. What the FCA can’t and won’t do however, is 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.
“For the moment LTAFs will only be available to sophisticated, high net worth and professional investors, but the FCA will consult on broadening this out to more retail investors next year. However, investing in assets like private equity and infrastructure is very much a minority sport amongst retail investors and financial advisers, and seeing as investment trusts and VCTs already offer an option for the few who want exposure, it seems unlikely there will be significant demand for LTAFs in this market. 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.
“The main buyers for LTAFs will be large pension default funds, who can afford to hold a small slice of illiquid assets in their portfolio. Provided they have adequate liquidity management controls in place, this should present an opportunity to add a bit of diversification to these funds, and potentially harvest some additional long term returns. This will need to be weighed up against the charges for investing in LTAFs, particularly in light of the charge cap on pension default funds. Private equity investment for example, is not exactly known for its bargain basement fees, and pension schemes will have to assess the benefit of investing in illiquid assets against any additional costs to members. Many pension schemes have already shifted heavily towards passive funds to keep charges down, and may be reluctant to see their annual management charge creeping back up.
“We are still waiting to hear the FCA’s plans for the open-ended property sector, and the launch of LTAFs with minimum 90 day redemption periods makes it more likely property funds will follow suit. Investment Association data shows the UK Direct Property sector has more than halved in two years, from £20.1 billion in September 2018 to £9.1 billion today. It’s likely that mandatory notice periods would lead to further outflows, and seriously undermine the viability of the open-ended property sector going forward. The LTAF will primarily serve an institutional market, where long notice periods are less of an issue, but the trading suspensions experienced by retail property funds in recent years highlight the difficulty of accessing illiquid assets through open-ended fund structures. The FCA has now provided the regulatory framework for such funds, but the asset management industry still needs to build successful products at a reasonable price.”