INVESTING EXPLAINED: What You Need To Know About LTAF Or Long Term Asset Fund Investing In Illiquid Assets – And How You Can Benefit
In this series, we break down the jargon and explain a popular investment term or theme. Here’s the LTAF.
Sounds a bit rude
That point has been made many times since the government first committed to launching the LTAF in November 2020.
It stands for Long Term Asset Fund, designed to hold a wide range of assets, especially “private” investments which are interests in companies not listed on a stock exchange. Such holdings must represent at least 50 percent of an LTAF’s assets.
Risky: Concerns have been raised about the marketing of LTAFs to individuals
What is the goal?
The government believes that support for such companies, especially in the fintech, infrastructure and social housing sectors, is a way to stimulate economic growth. Ministers would like to see a lot more money from pension funds channeled into such UK start-ups and many pension savers would support this.
Who are LTAFs for?
The main customer base is the defined contribution (DC) occupational pension plans – the type that covers the vast majority of employees. But high net worth investors who can afford to take a long-term view – and like to take a chance – will also be targeted in due course.
Concerns have been raised about the marketing of LTAFs to individuals, with warnings that these funds “could be an accident waiting to happen.”
High risk?
Yes, and there are also liquidity problems. Investments in private companies tend to be illiquid, which is difficult to sell quickly.
As a result, Financial Conduct Authority rules require an LTAF to have a minimum repayment period of at least 90 days. Some funds are likely to have longer maturities. This feature – which should limit the possibility of a run on the fund, when hordes of investors rush to leave the fund right away – should allay fears, but somehow they persist.
Why?
It seems to be because LTAFs are open-ended. That is, funds that can issue an unlimited number of shares. Several big-name open-end real estate funds closed late last year because office buildings and other properties could not be sold fast enough to meet the level of withdrawals.
Concerns about this aspect of LTAFs may be unfounded. Still, the worries don’t go away.
Who offers them?
Schroders and Aviva have announced both launches in recent weeks. BlackRock can follow. The Schroders Capital Climate+ LTAF is designed to help DC schemes support the net-zero transition.
LTAFs can provide much-needed diversification. But they can also be a new source of income for managers facing increased competition from low-cost index funds.
Are there no similar funds?
Some mutual funds are similar, which is why some commentators question why LTAFs are needed at all.
Dzmitry Lipski, of the Interactive Investor platform, argues that investment trusts are the most appropriate structure for illiquid assets, as they are closed-end funds with a fixed number of shares that are more resilient to redemptions.
Private equity investment funds, such as HarbourVest and Pantheon, focus on private companies.