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Index funds may be king of the retirement investing landscape, but a new player is drawing increasingly more interest from investors looking for alternatives to the standard stock-bond portfolio.<\/p>\n
Called an interval fund, it gives regular investors access to investments that have typically been the province of financial institutions and the ultra wealthy, such as venture capital, private credit, and private equity. Created in the \u201990s, the funds started growing in popularity following the 2008 financial crisis, according to Morningstar<\/a>, and total assets under management have grown almost 40% per year over the past decade to $80 billion through May 2024\u2014\u201dbucking the trend,\u201d as Morningstar says, of \u201cpersistent outflows from most actively managed strategies\u201d over the past few years. The financial services firm credits this increase to near- and current retirees looking for a greater return than public markets alone can get them.<\/p>\n \u201cWe don\u2019t usually see that type of growth in our industry,\u201d Brian Moriarty, Morningstar\u2019s associate director of fixed-income strategies and author of a report on the funds<\/a>, tells Fortune<\/em>. \u201cIt doesn\u2019t come up that often unless it\u2019s Nvidia<\/a>.\u201d <\/p>\n So what is the appeal? While normal mutual funds cannot invest more than 15% of their assets<\/a> into illiquid investments, interval funds don\u2019t have that restriction. So investors have access to private real estate, private equity, and more, and potentially higher yields than can be gained in public markets. Their increased popularity is part of a recent larger rise in appetite for non-traditional investments<\/a> yielding higher returns, particularly among wealthy investors.<\/p>\n Some include the Cliffwater Corporate Lending Fund (CCLFX), the biggest interval fund, according to Morningstar, and which invests in private credit, and the PIMCO Flexible Real Estate Income Fund (REFLX), which invests in public and private commercial real estate markets. The funds can yield between 9% to 11%, per Morningstar. <\/p>\n They also have a number of drawbacks, perhaps most significantly for the average investor being their illiquidity. While investors can buy into the funds whenever they want, they cannot sell any day they choose, like with a standard mutual fund or stock holding. For that reason, they are best suited for guaranteed long-term investments. <\/p>\n \u201cThey are easy to get into but not easy to get out of,\u201d says Moriarty.<\/p>\n That said, their growing popularity\u2014and the fact that big names like Capital Group, the world\u2019s largest active manager, T. Rowe Price<\/a>, and Wellington are entering the space, an indication that other asset managers may soon follow suit\u2014mean more investors will start considering adding interval funds to their portfolio\u2014or be pressured by their advisors to do so. Here\u2019s what to know before you do.<\/p>\n Interval funds are closed-end funds that work much like mutual funds do, but do not trade on a public exchange. But whereas with a standard mutual fund shareholders can sell on a daily basis, with an interval fund they are locked in, with redemption available on a quarterly basis (though the exact interval can vary).<\/p>\n The rationale there is to provide some stability for the underlying alternative assets investors are buying into, which are less liquid than a standard stock would be. Another difference: shareholders can only collectively redeem a certain percentage of the shares in a single interval\u2014usually around 5%\u2014meaning it would likely be difficult for one individual to sell all of her shares at one time. <\/p>\n That means that the assets cannot be tapped easily; depending on the investment, it could take years to fully divest.<\/p>\n \u201cYou can buy them every business day, the experience feels a lot like a mutual fund,\u201d says Moriarty. \u201cBut that is also the risk. It certainly does not feel like a mutual fund when you are trying to sell.\u201d\u00a0<\/p>\n The complexity and restrictions of an interval fund may outweigh its benefits for many investors, Moriarty says.<\/p>\n \u201cInterval funds might be good vehicles for investing in illiquid assets, but they should also be considered illiquid themselves,\u201d he writes in the company\u2019s investment guide<\/a>.<\/p>\n Most interval funds invest in assets that produce regular income, like bonds. That said, other interval funds invest in private equity, venture capital, fine art, or other alternatives.<\/p>\n It\u2019s important to understand what the fund can offer you, says Moriarty\u2014and what works best within the structure. Private equity, for example, may not be the best use case. While average investors may want exposure to it, there are other factors that could make it more complicated (like long lock-up periods) and sour the experience.<\/p>\n \u201cThe most common use case is just income generating assets. You can get more yield in this than with an ETF, and they are more suited for the interval fund wrapper,\u201d he says. \u201cMaybe liquidity isn\u2019t great but they can still be sold in a month, that\u2019s all you need. I think we\u2019re going to end up seeing a narrowing in the kinds of strategies that are offered.\u201d<\/p>\n Proponents of interval funds say they give investors an edge in an environment where the standard 60\/40 stock-bond portfolio split may no longer be optimal. That said, Moriarty says they\u2019re not intended to replace equity holdings completely.<\/p>\n \u201cThey\u2019re not going to become 50% of your portfolio. It\u2019s just not what they are for, it\u2019s not how they should be used,\u201d he says. \u201cThey can be part of a diversified portfolio because they are filling a particular need for that portfolio. But they are not going to replace the 60% equity in a 60\/40 portfolio.\u201d<\/p>\n An investor can typically buy into an interval fund via a registered investment advisor or directly with the fund company (and a few of the funds are limited to accredited investors, whether they have an advisor or not). There are often investment minimums, ranging from around $2,500 to $5,000.<\/p>\n Fees vary as well, but average 2.49%, according to Moriarty\u2019s report. That\u2019s compared to 0.58% and 0.99% for ETFs and mutual funds, respectively.<\/p>\n \u201cWithout very strong returns, that kind of price tag could still eat up a chunk of the liquidity premium expected from assets in an interval fund,\u201d he writes.<\/p>\n All of this said, the average investor is likely better off forgoing them, unless they have a sophisticated understanding of the funds and their use cases, says Moriarty.<\/p>\n \u201cThe degree to which they are likely to enhance long-term portfolio returns is at least open to debate,\u201d he writes. \u201cIf all an investor is looking for is amplified return, then it might be best to stick with funds focused on public securities that charge low fees.\u201d<\/p>\n<\/div>\nHow interval funds work<\/h2>\n
What interval funds give investors access to<\/h2>\n
How to invest in an interval fund<\/h2>\n
Bottom line<\/h2>\n
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