The Financial Conduct Authority (FCA) has authorised the first Long Term Asset Fund (LTAF), a new category of open-ended fund that will allow investors access to a wider range of assets.
The FCA worked alongside the Bank of England and the Treasury to develop rules that will create “an environment where investment in longer-term, less liquid assets, by investors who understand the risks, can flourish”, it said.
LTAFs will be a new concept for most investors, but plans to authorise them have been in the works since 2021.
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We explain what LTAFs and their risks are.
What is a Long Term Asset Fund?
Long Term Asset Funds (LTAFs) are a new type of open-ended fund designed to invest in long-term, illiquid assets.
Investors can invest in illiquid assets via other open-ended funds. But they can invest and withdraw money without notice, which can lead to liquidity issues.
To avoid this happening, the regulator ruled LTAFs require at least a 90-day notice period for redemptions. This will give the fund enough time to sell illiquid assets and return money to investors.
The regulator expects LTAFs to invest at least 50% of its holdings in these assets. The rest could be invested in other assets which can be sold more quickly to meet any redemptions.
What assets will LTAFs invest in?
Property is an example of an illiquid asset funds regularly invest in. Through LTAFs, investors will gain access to unlisted investments such as windfarms, artificial intelligence, and fintech that are otherwise essentially inaccessible.
The expectation is that not only will investors benefit from exposure to growing industries, but that they will also provide funding for these projects.
“The ability to invest in illiquid assets, through appropriately designed and managed investment vehicles is important for supporting economic growth and the transition to a low carbon economy,” the FCA said.
What are the risks of LTAFs?
Illiquid assets take longer to sell; if a fund is faced with too many withdrawals, or redemptions, a manager might have to freeze their fund. This means investors aren’t able to withdraw their money.
The FCA will require LTAFs to be transparent about these risks, and expects an LTAF’s manager to manage assets prudently so that they don’t have to be sold at a discount or in a rush.
But investors still need to be aware of the risks that come with investing in illiquid assets. These funds won’t be ideal for those hoping to withdraw money quickly.
They might appeal to those looking to gain exposure to investments in fast-growing industries, such as the renewable industry, that they might not otherwise be able to access. But investors must take a long-term view.
LTAFs will “help to diversify investment portfolios of savers - providing long-term security and delivering greater returns”, said Andrew Griffith, economic secretary to the Treasury.
While investment trusts also offer exposure to illiquid assets, these can “have issues of their own, as we have seen with widening discounts in the alternative assets trust space”, said Dzmitry Lipski, head of funds research at investing platform interactive investor.
“LTAFs should, in theory, shield investors where there is a ‘run’ on the fund, when large numbers of investors head for the emergency exit at the same time,” adds Lipski.
“But this is an untested model and we still struggle to see how the structure will solve the liquidity issue. So while we watch and wait, we still wish the structure the very best as it gets off the starting line, because it is investors who are the ones at risk of injury.”
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