Pension fund exposure to alternative assets must be built on firm foundations

Allocating funds to productive finance will require a balancing of the risks involved against expected returns says Richard Stone.

Richard Stone headshot

The Productive Finance Working Group today published its report ‘A Roadmap for Increasing Public Finance Investment’.

Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “We support the government’s ambition to encourage capital into long-term investments in areas vital to the reinvigoration of the UK economy. We welcome this report’s recognition that an allocation to productive finance, and other illiquid assets, can provide pension schemes with diversification and better long-term returns. Clearly, allocating funds to productive finance will require a balancing of the risks involved against expected returns, and careful management of the liquidity challenges arising.

“Investment companies already hold target asset classes such as infrastructure and development capital in a stable, tested structure that can weather difficult market conditions.  The proposed Long Term Asset Fund (LTAF) may provide another route but must be built on firm foundations and not risk undermining investor confidence.

“In recent years we have seen too many failures and prolonged suspensions resulting from a mismatch between redemption terms and the liquidity of the portfolio. It is critical that these lessons are learned. Wide retail distribution of LTAFs should only be considered when they have proved themselves to be resilient through the economic cycle, in both good and bad market conditions.

“Rushing to sell an untested and highly complex product to retail investors would be a mistake not just because it could lead investors into financial difficulties if things go wrong. Any failures would undermine investors’ confidence and their willingness to engage with productive finance investments. This could threaten the worthwhile objective set by the government to encourage capital investment in these areas.”

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Notes to editors

  1. Please see the AIC’s paper, ‘Square peg in a round hole’, which examines the dangers of holding illiquid assets in open-ended funds. This paper explains the AIC’s solution, reliable redemption.
  2. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 364 members and the industry has total assets of approximately £259 billion.
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