Interval Funds Can Provide Excellent Tool for Advisors
October 21, 2019 | Daniel Wildermuth | Wildermuth Advisory, LLC
Article edited on December 5, 2019
Interval Funds are gaining prominence as managers seek to provide certain investors greater access to non-traditional investments. The structure allows fund managers to move beyond the 15 percent limit on illiquid holdings that governs typical mutual funds, giving managers flexibility to pursue different strategies than are possible within a more standard structure limited to traded stocks and bonds. Interval fund managers frequently use interval funds to invest in less liquid investments such as real estate, private equity, credit, insurance, derivates, multi-strategy and the all-encompassing “other” category.
Investments in private markets continue to skyrocket often led by endowments and institutions while the number of public companies has shrunk to less than half of the companies listed in 1996. By focusing on larger private markets, fund managers can choose investments from a larger opportunity set. This freedom gives managers greater potential to possibly add value including opportunity identification, deal structuring, manager selection, and much more. The access to or investment in private markets does not guarantee a return, there is a risk of permanent loss of all invested capital. Some data suggests that private markets may produce higher long-term returns, partly due to the illiquidity premium – the additional return investors expect to receive as compensation for the investment’s lack of liquidity.
Different underlying non-traditional assets such as private equity and private real estate as well as investment structures results in portfolios that seek to perform differently over time than portfolios comprised primarily or exclusively of public traded securities. Some institutions have pursued this portfolio construction approach for decades because of the perceived diversification benefits and the potential opportunity to find value across different investment sectors.
Private Equity investments are not appropriate for all investors and an investment in them is intentionally restricted. Yet for those individual investors that do seek to investments in private equity, accessing private markets and less liquid holdings remains difficult because of lack of availability, poor quality choices, fees and potentially many other challenges. Interval funds may provide options for some investment strategies and certain investors because of the standardized structure that allows access to illiquid investments. An interval fund is considered an illiquid investment and is not appropriate for all investors.
Interval funds may also offer individual advisors and certain clients a familiar investment vehicle including standard trading and reporting systems and regulatory framework. Interval funds adhere to requirements outlining disclosure, valuations, pricing, reporting, auditing, board independence, leadership conduct, general governance and more.
In exchange for holding higher percentages of illiquid assets, the interval fund redemptions are periodic rather than daily. Most interval funds provide limited liquidity quarterly, and notably, all redemptions are made directly by the fund at current net asset value (NAV) rather than through a sale by another shareholder.
Lack of liquidity can be a negative or a positive since clients lose their ability to sell whenever desired. Interval funds though considered illiquid, seek to provide a periodic repurchase offer of no less than 5 percent of the outstanding shares in accordance with the fund’s repurchase policy, this may offer a piece of mind for some invest. For some, the constraint can be problematic, but for others, losing the ability to panic sell – unless the urge to panic arises during a redemption period– can be a positive, forcing investors to think before acting during potential economic and personal disruptions.
Some say manager selection is likely important given the wider array of choices available to an interval fund manager. In addition, the interval fund structure is merely a wrapper than enables implementation of a particular investment strategy. If a strategy is ill-advised or poorly executed, the interval fund structure will not fix it, and not all strategies fit in the wrapper given its mandated disclosures and regulatory requirements. As an advisor, however, daily pricing and transparency may provide insight into holdings and value, and quarterly limited liquidity reduces commitment to much shorter timeframes than those typically required of alternative investments.
Lastly, interval funds may offer an ease of management for some advisors. Daily pricing, periodic limited liquidity, straightforward pricing and custody may simplify account management when compared to other alternative investment structures. Explaining periodic limited liquidity versus daily liquidity is relatively manageable, it is important to explain to potential investors the fund limitations surrounding illiquidity as well as the potential benefits. While an interval fund only provides a wrapper for a specific investment thesis, the structure opens up a different range of investment possibilities to advisors that may be used as a tool to assist in the diversification of certain client portfolios beyond today’s richly valued public markets.
An interval fund is a continuously offered, closed-end fund that periodically offers to repurchase its shares from shareholders.
Interval funds are classified as “non-diversified” under the 1940 Act and can invest a greater portion of its assets in obligations of a single issuer than a “diversified” fund. Also, the interval fund is different to a mutual fund in terms of liquidity limits for the fund’s investments as interval funds have no limit to the amount of illiquid investments it holds.
Wildermuth Wealth is a service mark that encompasses the Wildermuth family of companies. It includes the portfolio management and distribution services associated with the Wildermuth Endowment Fund and Wildermuth Asset Management. Chief Investment Officer, Daniel Wildermuth, leads and manages these strategies along with a distinguished team of experienced, insightful analysts. Wildermuth Endowment Fund’s principal underwriters and co-distributors are Wildermuth Securities, LLC and UMB Distribution Services, LLC. UMB Distribution Services, LLC
