The ‘Long Term Asset Fund’ (LTAF) will be launched within the year to provide long term alternative and innovative investments.

I’m quoting here from a paper send by my Swedish friend Per Andelius and written by the lawyers CMS

The considerable growth in assets under
management in DC savings pots accelerated by auto-enrolment, has created demand not only for low-cost, high-volume funds for pension savers (that the current market caters for well), but an exploration of alternative and innovative investments aimed at long-term growth.

The investment industry, and in particular the
Investment Association (IA), is looking to meet the latter of these challenges with the ‘Long Term Asset Fund’ (LTAF), a vehicle for ‘patient’ capital.

Plans are well advanced, and the Chancellor of theExchequer, Rishi Sunak, speaking in November last year, is committed to launching the LTAF within the year, by November 2021.

I read this introduction with skepticism. There may be demand from those needing the long term capital of pensions but there is zero demand from the beneficial owners of that capital, people doing the saving and I suspect there is little inherent demand to change a working model, from the funders of the commercial master trusts or the sponsors of the fast-dwindling number of single occupational trust based DC plans.

The demand for this type of investment is coming from the Treasury and feeding through the DWP as pressure on the cash rich DC schemes to be more productive in the allocation of people’s money.

I have been looking at this at the micro level – for the past few days. I can understand why the venture capital industry wants access to the patient capital of DC funds as I wrote yesterday (and Julius Pursaill followed up on).

The Investment Association tell us that the LTAF will be looking to embrace a number of asset classes

• Private equity
  ⎯ Private credit
  ⎯ Venture capital
  ⎯ Infrastructure, including transport
  ⎯ Real estate
  ⎯ Forestry
  ⎯ Collective Investment Vehicles for private asset classes, such as limited partnerships

Well that’s what their marketing blurb says and here things get blurred. I had to look up these Collective Investment Vehicles to discover that they are no more than a mechanism to get to private equity, a mechanism designed to ensure that private equity get properly paid. “Properly” in this context , means “well” and probably “opaquely”.

I am not sure why one of these vehicles has to look as complicated as this – other than to feed mouths.

While I can see a point to investing in all of the above , I can see no point in investing in the means to get private equity paid. Surely this “Collective Investment Vehicle” is not an asset class in its own right (please comment if you can see an alternative argument).

The need to keep this simple

So far as I can see, the LTAF works so long as it is aiming to improve member outcomes. But when its purpose is to support the money managers – through complex structures as indicated above, it loses me and probably the support of many like me who would like my money more productively invested but directly.

The complex layers of intermediation in the diagram above (supplied by the BVCA)  do not sit easily with the needs of savers – which is to see their money directly invested and the investment paid for in a proper way. There is a need for keeping things simple and this does not look like it.

Fund structures

The CMS briefing, which appears to be a pass on from the IA, explains that the fund will be open-ended, meaning the price of each unit will
fluctuate in step with the underlying assets, rather than investor appetite for fund units. Additionally, in order to manage liquidity, units are likely to be able to be sold only at set intervals (for example, quarterly) with notice requirements preventing sharp market outflows. The aspiration is to avoid issues that funds promising to be more liquid have encountered during downturns – such as gating of property funds during the COVID-19 crisis.

This seems admirable and understandable. We look forward to seeing the details but I see no requirement for total liquidity – other than where a fund is likely to totally liquidate (such as when being consolidated) and even then – one would hope that a consolidator could take on holdings in the LTAF in specie.

LTAF is welcome but let’s tread carefully

CMS’ briefing ends with the usual casuistry of lawyers (on the one hand and on the other stuff).

Whilst in principle providing further diversification potential to pension savers has to be welcomed, the success of the fund will be dependent on ensuring it has the investor protections to be marketable to a retail audience, and pragmatically structured to be appealing to institutional investors.

Getting this balance correct with industry buy-in will be essential, and should trump the policy-maker set deadline to get it up and  running as soon as possible.

The golden rule here, which “trumps” all this baloney, is that the fund will need to be seen to be about improving member outcomes, not feeding the members of the Investment Associations insatiable appetite for (hidden) fees.

All this concern for the vulnerability of the retail investor is best mitigated by being open about what things cost and open about how the money is taken out of the fund to pay the managers. “Pragmatically structured” looks shorthand for – “doing it our way”.

I would urge the DWP and the Treasury to remember that the IAis infamously the organization who likened their hidden charges to the Loch Ness Monster.

The IA  has since removed the report from public sight but you can read Con Keating’s savage review of the report here.

Hidden charges have since been brought to the surface- unlike Nessie. The IA has form, we should tread very carefully.