At a time when outflows are a feature of markets, and many traditional investment products are out of favour with clients, it is a brave venture indeed to bring completely new fund structure to market, yet a range of providers are currently tip-toeing into the adviser space with long-term asset funds following Financial Conduct Authority approval in the middle of 2023.
Although the products will likely only be coming onto the radars of advisers now, the inception of LTAFs goes back to 2021, when a regulatory framework was created for these products following consultations.
That framework was designed around defined contribution pension portfolios, rather than for advised clients.
LTAFs are able to own assets that cannot be sold quickly to meet redemption requests from clients, with four areas of focus: private equity, infrastructure, property and private credit.
Unlike other open-ended funds, there is no daily liquidity with LTAFs; clients are required to provide a minimum notice period of three months, and then may have to wait a month to actually receive the cash.
All of those asset classes can be accessed in a way that offers daily liquidity, via investment trusts, but most DC pension plans, and increasingly many wealth managers, are too large to be able to invest in those vehicles.
The issue of liquidity within open-ended funds has been impactful for advisers for many years as a result of physical property funds being forced to suspend withdrawals during periods of political and market instability, and the suspension of the Woodford Equity Income fund.
Time sensitive
James Lowe, sales director of private assets and investment trusts at Schroders, one of the first firms to launch an LTAF, says: “The regulator's view was that pension funds can have the long-term time horizon and so can tolerate the illiquidity of the asset class. The fund structure itself is not new; open-ended fund evergreen structures have existed in Luxembourg for many years.”
When applying to the regulator for permission to launch an LTAF, Lowe says: “You have to demonstrate that the liquidity of the underlying asset class is aligned with the withdrawal terms of the fund, you can’t just use a cash buffer.”
Many of the open-ended property funds that ran into trouble had tried to mitigate the illiquidity of physical property as an asset class by retaining a substantial portion of the funds in cash, typically around 20 per cent, and to use this buffer to meet client withdrawal requests.
That led to clients having 20 per cent of the capital they wanted to invest in property in cash, which they pay a fee on and impacts performance, however it was not sufficient to prevent the funds suspending withdrawals.
One of the ways the FCA has sought to ensure that LTAFs will retain sufficient liquidity if they are offered to advised clients is to make it a pre-condition of their launch that they cap the total amount that can be withdrawn from a fund each month.
In the case of Schroders' private equity evergreen structures, which are not LTAFs but may be an example of what can be done within the open-ended structure, Lowe says they set a limit of 5 per cent for withdrawls, based on the fact that the fund generates capital gains, without selling assets, of 5 per cent a year” to instead read: “Lowe says they set a limit of 5 per cent for withdrawals, based on the fact that the fund asset base, in normal conditions, is expected to generate cash distributions or realise capital in line with this level”.
