Finance is the industry for acronym lovers, and today we’ll be discussing the latest buzzword that just rolls off the tongue: Ltafs, or long-term asset funds.
As its name suggests, these are a mechanism for allowing access to illiquid assets such as private assets, property and infrastructure.
(Do count the number of acronyms we're about to use, by the way)
Since this instrument was first introduced in 2021, a number of fund management companies have duly launched one, including Schroders, Fidelity, Aviva Investors and LGIM. Last week, Future Growth Capital - a joint venture between Schroders and Phoenix Group - announced the launch of a multi-asset Ltaf.
Though originally aimed at the defined contribution pensions market, the FCA’s granting of RMMI (restricted mass-market investments) last year has made them more widely accessible, including to the wealth management industry.
In terms of tax wrappers, this includes being eligible for use within both Sipps and the Innovative Finance Isa.
So now that Ltafs can be held in portfolios, the question is: will they?
Beginning with multi-asset funds, then, there’s an ongoing quarterly consultation paper from the FCA looking to come to an agreement upon their best use.
“To us, it feels like a very sensible way of getting underlying retail clients invested into long-term private market type products where you've got a professional fund manager managing their the liquidity on their behalf in the fund structure, rather than something that the retail investor is directly exposed to,” said James Lowe, private assets sales director at Schroders, one of the leading proponents of Ltafs.
But Emma Napier, consulting director at NextWealth, said it "seems unlikely" that they will be widely used in MPS or DFM propositions - highlighting that very few clients had portfolios with this kind of exposure to begin with.
She said: "We're currently looking at private market investing for an upcoming report. We’ve found around a fifth of financial advisers have clients with this type of investment but there are barriers to broadening access to more clients. Our observation is that DFMs may consider Ltafs for clients at the earlier accumulation stage of their investment timeline."
On the MPS side, then, the same platform infrastructure issues that scupper widespread investment trust usage are also likely to prove a headwind for this newer vehicle as the systems often aren’t equipped to deal with monthly and quarterly dealing.
Caution on behalf of platform providers isn’t without reason, though – the aftermath of the Woodford saga showed just how vital liquidity is to portfolios, especially when things go south.
“It seems easy to ignore underlying liquidity when a fund is in net subscription mode, but it becomes all-important when a fund turns to net redemptions, especially if these are prolonged,” said Bevan Blair, One Four Nine’s chief investment officer, when we covered this issue in depth some months ago.
Investors must give six months’ notice before withdrawing from an Ltaf, so meeting redemptions in a panic could prove sticky.
Where Lowe sees the most potential for uptake is in high-net-worth space, where investors have large pools of capital, generally longer time horizons, and therefore hold an ability to take on a degree of illiquidity.
And in terms of demand, there is yet to be a mass uptake into these funds, but he puts this down to a lack of product availability.
“The structuring of it was not set up for the wealth market, and basically they can't buy them,” he said. “Until you start seeing these fund structures launch, you probably won't see any demand.”
Not all are so optimistic. Glenn Meyer, at Bristol-based DFM RC Brown, said he wonders whether the inception of these strategies arose from a marketing push or a demand pull.
“It’s unlikely that these vehicles would be suitable for cautious clients,” he told Asset Allocator. “We could exclude this asset class from our more risk averse models but ensuring even those clients with higher risk tolerance properly understand the risk involved is still a formidable challenge.
"I may remember that syndicating a large number of high risk mortgage debts in an mortgage-backed security does not create a low-risk investment, but I don’t want our clients to have to learn a similar lesson for themselves."
Ouch.
