Long-Term Asset Funds (LTAF) with the highest expected returns offered around 5 per cent a year more in expected returns than those with the lowest, according to analysis by XPS Group, which also found wide variation in fees, asset allocation and liquidity structures.

The report, Decoding the LTAF Landscape: Same Label, Different Outcomes, analysed data from 22 LTAFs using XPS capital market assumptions to create like-for-like comparisons.

The research found that total expense ratios ranged from 0.6 per cent to 3.3 per cent a year, while the proportion of assets allocated to liquidity ranged from 0 per cent to 30 per cent of fund assets.

XPS said the differences could become more significant as defined contribution (DC) schemes prepare for the government's value for money (VFM) framework, which is expected to place greater emphasis on peer-relative performance, leading investors to favour private market assets with higher expected returns than equities.

“The VFM framework is already driving a laser focus on achieving strong net of fee returns versus peer DC asset owners,” said XPS Group senior investment consultant, Neil Maines.

“We believe that selecting the right private market allocation will be a key component of meeting the requirements of the Government’s imminent VFM framework,” he added.

According to the report, there was no single LTAF strategy, with underlying investments ranging from specialist private equity and venture capital strategies to private credit and multi-asset approaches.

The report added that investment decision-makers should assess how individual LTAFs align with their scheme's objectives, risk appetite and operational requirements.

“Liquidity is one of the most important judgements DC schemes need to get right when investing in private markets,” said XPS Group senior investment consultant, Joe Howley.

“The right balance will depend on the individual circumstances of each scheme, but liquidity should be a deliberate part of the investment strategy rather than simply a by-product of fund selection.”

---