At a time of market uncertainty and disappointing returns, retail investors are looking to expand their investment landscape and venture into new territories.
In a bid to help this diversification process, the Financial Conduct Authority (FCA) recently set out new rules to give retail investors access to long-term asset funds (LTAF).
The LTAF is an open-ended fund that offers long-term investors access to a wide range of assets including private market investments.
So, will expanding the reach of LTAFs to retail investors be a good thing for the market?
Diversification of portfolio
Expanding LTAFs to retail investors can offer individuals the opportunity to diversify their portfolios with more non-traditional assets that would have previously only been available to a handful of investors.
James Wilson, IFA at Fairstone, said: “LTAFs are a high-risk investment product that can provide retail investors with greater diversification within their investment portfolios, the opportunity for greater returns and the potential for better retirement outcomes.”
Not only can LTAFs provide diversification to a retail investors portfolio, they can also produce higher returns than listed assets and saves the investor from having to invest in multiple funds at one time.
Nicholas Hyett, investment manager at Wealth Club, added: “Rather than having to invest in private equity funds from a dozen managers across various vintages, probably requiring millions of pounds, an investor can (in theory) pick a single well diversified LTAF that already pools investments into all those funds.”
This makes LTAFs far more accessible than a traditional fund with lower minimum investments.
Volatility and risk
While there is an argument for allowing retail investors to access LTAFs, there are some areas of concern as they are more complex than traditional open-ended funds and their illiquid nature will come with its own risks.
John Somerville, head of financial services at the London Institute of Banking & Finance (LIBF), said: “The very nature of these assets mean that investors will experience greater potential volatility with no access over the short to medium term and are only suitable for those prepared to put the time into the market for their money to reach its full potential.”
The illiquidity of LTAFs can be a positive for those who wish to invest their money for a long period time, but those looking for a short-term gain from their investments may not benefit from these types of funds.
Arash Nasri, senior vice-president at Redington’s global asset team, added: “Investors often like knowing that their investment can be liquidated at very short notice , moving to something like a once-a-year liquidity points is something that will take retail investors a lot of getting used to.”
Therefore, it is crucial for retail investors to understand what they’re getting into at the point of investment to make sure that it fits their lifestyle and financial needs.
Yazmin Boden, partner at GSB Capital, said: “For those close to retirement or with an upcoming withdrawal requirement, allocation to LTAFs are unlikely to be suitable due to the potential liquidity issue.”
Receiving financial advice
Investing in an LTAF can give retail investors access to a broader range of investment options that can provide them with good long-term returns, however it is important to assess whether the individual has the knowledge and experience to do it on their own.
John Westwood, chairman at Blacktower, said: “Retail investors who lack expertise in this area may benefit from consulting a qualified financial adviser who can provide guidance, asses their investment objectives and ensure that the investment aligns with their overall financial plan.”
Jock Glover, strategic relationships director at Square Mile Investment Consulting and Research, added: “The asset managers of these LTAFs will have to provide risk warnings and summaries of the strategy as well as conducting appropriateness assessments and making sure they have adhered to the Consumer Duty, acting to deliver good customer outcomes.”
GSB’s Boden pointed out that small errors can compound throughout the years therefore seeking help from a financial adviser can help a retail investor to select those funds that best fit their needs and objectives.
Steven Cameron, pensions director at Aegon UK, said: “As more LTAFs are launched, there will also be a key role for advisers in understanding and recommending the most appropriate for their client’s attitudes towards risk.”