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Fixed-Income Insights

Interval funds can allocate to asset classes that are less liquid than those typically found in mutual funds but may offer the potential to generate higher long-term returns.

Interval funds are investment vehicles that provide individual investors with access to strategies that are typically limited to institutions such as hedge funds or pension plans. These strategies may allocate to asset classes that are less liquid than those typically found in mutual funds but may offer the potential to generate higher long-term returns.  

  • Interval funds are not required to provide investors with daily liquidity; rather, they will offer to repurchase a certain percentage of outstanding shares at set periods or “intervals,” throughout the calendar year (often quarterly).
  • The periodic repurchase schedule of an interval fund allows the investment manager to take a longer-term view with respect to allocating shareholder capital. 

How do interval funds compare to mutual funds?

Both mutual funds and interval funds are pooled investment vehicles that allow individual investors to access  a diversified portfolio of securities, and both are registered under the Investment Company Act of 1940.

Like open-end mutual funds, interval funds are typically priced daily at net asset value (NAV).  Shares of both types of funds are continuously offered, meaning investors may purchase shares any day the market is open.  There are, however, some important differences to note:

  • Open-end mutual funds provide daily liquidity, allowing investors to redeem any day and receive the closing NAV price.
  • Interval funds, in contrast, offer limited liquidity.  On a periodic basis, typically quarterly, interval funds offer to repurchase a limited number of outstanding shares, as set forth in the fund’s prospectus.
  • Per SEC regulations, repurchase offers must be made for at least 5% of the interval fund’s common shares outstanding.  If requests for repurchases exceed 5%, shares may be redeemed on a pro rata basis.

What are the potential benefits to investors of the interval fund structure?

Given the periodic repurchase schedule of an interval fund, as opposed to the daily liquidity of an open-end mutual fund, portfolio managers can take a longer-term investment view.  This allows the manager to take advantage of investment opportunities in less liquid, potentially higher-return asset classes that may not be suitable for an open-end mutual fund offering daily liquidity. For example, opportunities may arise in smaller issues of high yield bonds, bank loans, private debt, structured products, and real estate.

What are the risks when it comes to investing in an interval fund?

Given the reduced liquidity of interval funds, investors need to consider their liquidity needs and investment horizon before investing.  In fact, it might be prudent to consider an interval fund an illiquid investment. This is because:

  • Liquidity risk may be greater in interval funds that invest in securities of companies with smaller market capitalizations, lower rated credit, and/or derivatives. As with any financial decision, one should carefully read all information available to understand what makes up the fund’s investment pool.
  • Although interval funds make periodic offers to repurchase a portion of outstanding shares, there is no guarantee that investors will be able to sell interval fund shares at any given time or in the quantity that they desire. An interval fund is required to offer to repurchase a certain percentage of shares at set periods, or intervals, at a price equal to the fund’s net asset value (NAV). An investor can only exit the fund at the designated intervals as described in the fund’s prospectus.

An investment in an interval fund is not suitable for investors who need certainty about their ability to access all of the money they invest in the short term. Before investing in an interval fund, investors should be knowledgeable to the  risks associated with the investment vehicle, including the liquidity risks discussed herein, and the risk that the fund’s ability to be fully invested and achieve its investment objective may be affected by the need to fund repurchase obligations. In addition, investors should be aware of the risks associated with the types of securities that the fund may invest, and the fees and costs associated with investing in an interval fund which may be significantly greater than those of other fund structures. Investors should fully read all of the fund’s available information, including its prospectus and most recent shareholder report, and consult with their financial advisors about the suitability of an interval fund in their portfolios.

How do interval funds compare to typical closed-end funds?

Interval funds are classified as closed-end funds, but differ in several ways from exchange-listed closed-end funds:

  • Traditional closed-end funds are typically issued through a one-time initial public offering and trade on an exchange, while interval funds are continuously offered and are not listed on an exchange.    
  • Listed closed-end funds may trade at a premium or discount to their NAV, while interval funds are priced at the fund’s daily NAV.
  • Shares of listed closed-end funds are continually traded throughout the day, whereas shares of an interval fund may only be redeemed periodically (e.g. quarterly) according to the fund’s repurchase schedule.  

How do investors redeem shares of an interval fund?

  • An interval fund is required to repurchase at least 5% of its shares on a periodic basis.
  • In order to redeem shares, shareholders submit repurchase requests in advance of the “repurchase date.”
  • The fund will mail a repurchase notice to shareholders that outlines the details of the repurchase process, including the date by which requests must be made, and the actual repurchase date.
  • If repurchase requests exceed 5% of the fund’s outstanding shares, the fund may redeem shares on a pro rata basis.

What is the timing of a Repurchase Offer?

An interval fund’s repurchase offer deadline can be no less than 21 days from the date that the fund sends the repurchase notice to its shareholders. Shareholders are permitted to withdraw or modify their repurchase request up until, but not after, the repurchase request deadline. Interval funds must file a copy of the notice with the SEC within three days after sending it to shareholders.

 

Chart 1: Sample Repurchase Offer Timeline

Source: Lord Abbett.

 

Note About Risk: An investment in an interval fund should be considered speculative and involves a high degree of risk, including the risk of a loss of some or all of the amount invested.

Past performance is no guarantee of future results.

This material is provided for general and educational purposes only. The examples provided are for illustrative purposes only, and are not indicative of any particular investor situation.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement investor, contact your financial advisor or other non-Lord  Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

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