Laith Khalaf, head of investment analysis at AJ Bell:
The Long Term Asset Fund
“Last year the Chancellor committed to launching a Long Term Asset Fund, which invests in illiquid assets like private equity, private debt, venture capital, infrastructure and real estate. Given that his stated deadline for getting one up and running was this November, the forthcoming Budget looks a likely podium from which the Chancellor can announce the arrival of these funds with a flourish.
“The Chancellor has no doubt eyed the huge sums of money sitting in pension funds and decided that would make a rather nice funding pool for infrastructure projects and private British companies. He’s not wrong on that score, but the challenges in bringing such a product to market are not inconsiderable, and the benefit to end investors is theoretical and unclear. The main issue with investing in illiquid assets is- drum roll- they aren’t very liquid. The fudge coming down the road is allowing long notice periods for LTAFs, possibly longer than 6 months, rather than standard daily dealing.
“All very well, but this shifts the liquidity problem onto the multi-asset default funds that are expected to invest in these products. These funds generally have well-diversified portfolios, and investors bases, so in theory a few percent of illiquid assets shouldn’t present any problems, providing they have extensive liquidity risk management in place. However, applying such risk management techniques to a newly created fund class also presents challenges, and some multi-asset managers may well prefer not to allocate some of their capital to funds they can’t get their hands on for the best part of a year, and then at an unknown price.
“The FCA is also considering extending these products to retail investors, where the intricacies of liquidity management probably aren’t quite as well understood. Retail investors also already have access to illiquid asset classes through investment trusts, an area big pension funds find it harder to access because of size and dealing constraints. Investing in assets like private equity and infrastructure is very much a minor sport amongst retail investors and financial advisers, and seeing as investment trusts already offer an option for the few who want exposure, it seems unlikely there will be significant demand for LTAFs in this market.”
Property Funds
“The FCA’s long awaited policy announcement on notice periods for open-ended property funds would also likely be forthcoming if the Chancellor announces the LTAF at the Budget, as the regulator was waiting for feedback on the LTAF consultation to make a final decision, and clearly the two policies are closely linked.”
NS&I Green Bonds
“The Chancellor has also committed to launching a green NS&I savings bond this year, and we could well see Rishi Sunak announcing the interest rate in this Budget, in much the same way George Osborne did with the NS&I Pensioner Bonds in 2014. The launch of a three year green savings bond, backed by the Treasury, will be a welcome addition to the UK cash market, and will give savers a place to park their money and do their bit for the environment at the same time.
“However, the question of what rate to pay is politically charged. Too little, and it will disappoint savers, and could lead to a product flop, particularly when the potential for interest rates to rise is already likely to deter savers from locking their money away for three years. Too much, and clearly questions will be asked about the cost to the taxpayer, particularly when taxes and the cost of living are on the up, and Exchequer resources are stretched to the limit.
“The government could borrow money for its green infrastructure spending plans through the gilt market instead of through NS&I. The current rate of government borrowing for a three year gilt is just 0.7%, and that compares to an interest rate of 1.8% on some of the best deals for three year savings products on the cash market. On the £15 billion of borrowing the NS&I will be raising through the green bond, closing that rate gap could end up being a significant cost to the taxpayer. If the Chancellor offers a market-leading rate, he will be open to accusations of buying green credentials with taxpayers’ money.”
