INVESTING EXPLAINED: LTAF or Long Term Asset Fund

In this series, we bust the jargon and explain a popular investing term or theme. Here it’s LTAF.

Sounds a little rude

That point has been frequently made ever since the Government first committed to the launch of the LTAF in November 2020. 

It stands for Long Term Asset Fund, designed to hold a wide range of assets, most notably ‘private’ investments which are stakes in companies not quoted on a stock market. Such holdings must make up at least 50 per cent of the assets of an LTAF.

Risky: Concerns have been raised about the marketing of LTAFs to individuals

What’s the aim?

The Government believes that backing such companies, particularly those in the fintech, infrastructure and social housing sectors, is a way to stimulate economic growth. Ministers would like to see a lot more pension fund cash being channelled into such start-up British ventures and many pension savers would support this.

Who are LTAFs aimed at?

The principal clientele is to be defined contribution (DC) company pension schemes – the type that cover the vast majority of workers. However, wealthy investors who can afford to take the long-term view – and have a liking for a gamble – will also be targeted in due course. 

Concerns have been raised about the marketing of LTAFs to individuals, with warnings that these funds may be ‘an accident waiting to happen’.

High risk?

Yes, and there are also liquidity issues. Stakes in private companies tend to be illiquid, that is difficult to sell in a hurry.

As a result, the Financial Conduct Authority rules require an LTAF to have a minimum period for redemption of at least 90 days. Some funds are likely to have longer periods. This feature – which should limit the possibility of a ‘run’ on the fund, when hordes of investors hurry for the exit at once – ought to allay the anxieties, but somehow they remain.

Why?

It seems to be because LTAFs are open-ended. That is, funds that can issue an indefinite number of shares. Several big name open-ended property funds were gated late last year, as office blocks and other premises could not be sold quickly enough to meet the level of withdrawals.

The apprehension over this aspect of LTAFs could be unfounded. Nevertheless, the concerns are not going away.

Who’s offering them?

Schroders and Aviva have both announced launches in recent weeks. BlackRock may follow. The Schroders Capital Climate+ LTAF aims to help DC schemes support the net-zero transition. 

LTAFs can provide much-needed diversification. But they could also be a new source of revenue for managers facing mounting competition from low-charge index funds.

Aren’t there similar funds?

Some investment trusts are similar, which is why a number of commentators are questioning why LTAFs are even necessary. 

Dzmitry Lipski, of the Interactive Investor platform, argues that investment trusts are the most appropriate structure for illiquid assets since they are closed-end funds with a fixed number of shares that cope better with redemptions. 

Private equity investment trusts, such as HarbourVest and Pantheon, focus on private companies.

This post first appeared on Dailymail.co.uk