Sales of LTAFs aren’t going well and this doesn’t bode well for both the Conservative and Labour party’s plans to put our long-term savings to work for the good of the country.

This week we learn that sales of LTAFs to wealth managers are suffering both from supply and demand

To set up an Long Term Asset Fund takes capital and to sell one takes customers. The pension industry claimed that to offer illiquid private market funds – it would need to access them on the life insurance platforms they used to run the investment administration service. These platforms are run by the mainstream insurers, L&G, Aviva, Scottish Widows, Phoenix Standard Life and the specialist insurer Mobius, which is pretty well exclusively a fund administrator. The point of these life platforms is to take the risk out of investment administration and to offer access to funds of multiple managers under “open architecture”.

To date, only one fund manager is associated with the LTAF. Schroders – has brought an LTAF to market and is the recognised market leader BlackRock and Aviva also have LTAFs but they are far from generally available and they are still considered a niche product.

Scanning the interweb for promotional material for LTAF’s, I could find this advertisement for a product that could offer a “higher return in a low interest environment”.  This didn’t sound like the environment I live in today and it soon became evident that video (which can’t be republished) was made at the beginning of 2022.

Infact , LTAFs were first approved in 2021 and Schroders’ LTAF was launched in March 2022. It will soon be “celebrating” its first birthday.

Why no demand?

Schroders offer three good reasons for investment in an LTAF

1. It widens the breadth of opportunity – it diversifies
2. It provides better returns over time – it’s better value
3. It offers private managers the opportunity to improve ESG

Schroders show that private markets have outperformed public markets over the long term.

there is a large part of me that wants the returns in the black column rather than those of the orange and green column, especially if those are net returns (after the managers have taken their fees).  I guess we have got so used to debunking history that we don’t think this matters , but if I’d been invested in an LTAF delivering me more than 13% pa over the past 20 years, my DC pot would be twice the size it is and I’d be writing this blog from Bermuda.

Why no supply?

My suspicion is that LTAFs are not getting the message across that they give people more, provide diversification and so reduce the risk of concentration and improve ESG.

Instead they are being talked of as “illiquid”, they have a 90 day redemption cycle” meaning you don’t have a right to your money back for a quarter of a year.

They are being talked of as expensive, they cost too much for workplace pensions and wealth managers struggling with “VFM considerations”.

They aren’t needed, the public are not calling for access to markets they know little about and this is a case of “let sleeping dogs lie”.

I suspect that there is a fourth reason, which is that there is inadequate research into funds , to properly do the due diligence on LTAFs and in a market where other things matter more, LTAFs have just not captured anyone’s imagination (except Julius Pursaill’s).

Are there alternatives?

As this blog has been saying for some time, there are alternative ways to access those black columns, diversify your portfolio and improve ESG. You could buy shares in a listed investment company (trust)  that primarily invests in the same assets as LTAFs do (or don’t). If you did today, you’d be buying into  these assets at a deep discount to the valuation of the assets within the company. It’s a bit like buying food on the yellow label in the supermarket, you need to be clear about what you are buying but you can buy more for less.

But such shares aren’t being much purchased , partly because they look extremely expensive when disclosed in a client’s portfolio (for reasons explained on this blog – relating to a regulatory complication that’s a Brexit hangover)

But I fear there are deeper reasons for not buying these shares and they relate to the way that we now organise and see our investments. 20 years ago , if you were wealthy or had a large pension pot, it was probably down to your stockbroker who bought and sold shares for you. Today you will not have a stockbroker but a wealth manager who will buy and sell funds for you. If you have a private pension pot , it is run on an insurance platform in funds and not as a self invested personal pension, directly accessing the markets.

In short, we live in a highly intermediated market which relies on fund managers to buy and sell stocks rather than stock-brokers. For this reason , investment companies are not directly held in our portfolios.

The LTAF failure to take-off, coupled with lacklustre demand for investment company shares means that money is not getting into private markets as the Government hoped. It is only through VCTs , EIS and SEIS that wealth is invested in private markets and this investment is heavily dependent on deep tax subsidies.

So what is the future for LTAFs?

William Robbins,  chairing a very male group of wealth management strategists, sees the future for the LTAF as a “re-wrap”, where the LTAF wrapper finds itself within another wrapper and presented to customers not as a purchased fund, but a part of  a multi-fund offering.

This is how DC pensions are expected to absorb LTAFs (Cushon’s “pricey” default has a slug of Schroder’s LTAF in it).  Cushon have a “not so pricey” default which is what they use to win business. This version is LTAF free. LTAFs may be what you put in the shop window, but cheap trackers is what you put in the customer’s shopping trolleys.

This is a pretty dismal fate for what was lauded in 2021 as a flagship product and relegates the LTAF to the dreaded “building-block” status .

If the future of LTAFs is no more than a building block within a more complex fund structure, I wonder why anyone bothered in the first place, after all – the investment companies have been offering that for decades.

LTAFs are going to have to do better than that to fulfil the potential claimed for them two or three years ago. Right now I don’t see their champions among intermediaries and I don’t see the public directly purchasing when yellow label alternatives  in the FTSE 250 look a lot more attractive.

The future for LTAFs looks grim