The investment arm of Aviva PLC (LSE:AV.) has launched its first fund under the UK’s new long term asset fund (LTAF) format, seeded with £1bn of real estate assets.
It is the biggest LTAF to launch since the new regime was introduced in the wake of the troubles endured for funds investing in illiquid assets in recent decades.
Aviva’s life insurance arm provided the initial £1.5bn of real estate assets that the fund has “carefully selected” and in which it will invest directly.
Aviva Investors said the new REALTAF fund has a long-term absolute return target and will follow the firm’s preference to invest in what it says are “high-conviction locations and emerging themes it strongly believes are well-placed to deliver long-term value”.
The company, which is one of the largest investors in UK real estate, said the fund will review carbon emissions generated by buildings in the portfolio and conduct audits of net zero alignment and social value to “help inform asset allocation decisions and drive investment performance”, as it believes that “real estate assets incorporating sustainability considerations will materially outperform those that do not adequately price-in material risks from sustainability-related obsolescence”.
The Financial Conduct Authority granted Aviva approval in March for the LTAF, a new category of open-ended fund designed to allow authorised funds to invest in more long-term illiquid assets, which have a minimum 90‑day notice period and allow dealing no more frequently than monthly.
The new fund format was devised after years of warnings that open-ended funds were not suitable for investing in less liquid assets, including the International Monetary Fund warning last year that they are a “major potential vulnerability” of the financial system as they are vulnerable to waves of investor withdrawals in the wake of economic shocks, which have been seen in the early weeks of the Covid pandemic and after the Brexit referendum.
Aviva moved to wind up its giant property funds, like several fund industry peers, after suspending withdrawals in 2020.
Chief investment officer Daniel McHugh said the company believes the new fund “represents the future of real assets investing”.
The funds are seen as offering regular, inflation-linked income for pension funds and sophisticated investors, and there is an ongoing FCA consultation on broadening access to these funds for retail investors.
As well as providing important risk or return diversification in long-term investment, McHugh said real assets funds are also “a vitally important ingredient in the transition towards a just and socially equitable low carbon future”.
“Until now, a significant portion of the UK’s wealth and pension market – particularly defined contribution schemes – have not been able to allocate to real assets, and certainly not to the extent they would like. We firmly believe the LTAF regime will have significant benefits for retirement portfolios, helping to improve long-term investment outcomes for our clients and, ultimately, individuals saving for their retirement.”
Schroders, which was the first company to gain approval for its LTAF in March, launched a climate-focused fund that, as well as real estate, will invest in infrastructure, private equity, natural capital and biodiversity-focused assets through its own and externally-managed funds.