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Understanding Interval Funds

A type of closed-end fund that offers to repurchase at periodic intervals a limited percentage of outstanding shares, interval funds offer a number of potential benefits to investors.


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Voice over: In today’s low yield environment, investors are challenged as some of the highest yielding securities are often the hardest to buy and sell, for example, public and private residential mortgage markets or opportunities within private credit sectors.

Interval funds can provide access to these less liquid investment strategies, which may help to enhance risk-adjusted returns or provide alternative sources of return.

So, what is an interval fund?

An interval fund is a type of closed-end fund that offers to repurchase a limited percentage of outstanding shares at periodic intervals.

Unlike traditional closed-end funds, interval funds are not typically sold through an initial public offering and do not trade on an exchange.  

Instead, they are sold directly to investors.

Interval funds have these benefits:

Just like private funds, they are able to invest a greater portion of assets in less liquid securities by limiting redemptions.

However, unlike private funds, they feature 1099 tax treatment and typically do not require investors to be qualified purchasers.

And, they tend to have a lower minimum investment than most investment portfolios that invest in private securities.

Because of their structure, interval funds are not vulnerable to the sudden redemptions that can force funds with daily liquidity to sell securities. This allows interval funds to be opportunistic during these and other periods of market dislocation.

Interval funds can invest in a wide array of asset types, but have primarily focused on structured credit, private credit, real estate and reinsurance risk.  

Many focus on providing attractive income. And because the  structure is designed for those who do not need access to their capital for an extended period of time, interval funds tend to align investors who share a long-term orientation.

So, how does it work?

Investors are provided with limited liquidity through periodic share repurchases at net asset value.

Interval funds are required to offer to repurchase between 5% and 25% of outstanding shares once per interval. This can be monthly, quarterly, semi-annually or annually.

If requests for repurchases exceed the amount offered, redemptions are distributed proportionately.

And interval funds are permitted to deduct a repurchase fee from the repurchase proceeds, intended to compensate the fund for expenses directly related to the repurchase.

It’s important to keep in mind that interval funds can expose investors to certain risks:

  • Interval funds can expose investors to liquidity risk, and that risk is greater in funds that invest in securities of companies with smaller market capitalizations, derivatives or securities with substantial market and/or credit risk.
  • Even though interval funds make periodic offers to repurchase a portion of outstanding shares, investors should consider interval fund shares to be an illiquid investment.
  • 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.
  • Investors should be knowledgeable about the unique risks associated with interval funds and carefully read all of the fund’s available information, including its prospectus and most recent shareholder report.

To learn more about interval funds go to pimco.com

Disclosure


All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Private credit is considered speculative and may only be suitable for persons of adequate financial means who have no need for liquidity with respect to their investment and who can bear the economic risk, including the possible complete loss, of their investment.  The value of real estate and portfolios that invest in real estate may fluctuate due to: losses from casualty or condemnation, changes in local and general economic conditions, supply and demand, interest rates, property tax rates, regulatory limitations on rents, zoning laws, and operating expenses. Structured products such as Collateralized Debt Obligations (CDOs) and Collateralized Loan Obligations (CLOs) are complex instruments, typically involving a high degree of risk and intended for qualified investors only. Structured credit investments are exposed to risks such as credit, default, liquidity, management, volatility and interest rate risk.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2018, PIMCO.

Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Investments LLC, U.S. distributor, 1633 Broadway, New York, NY, 10019 is a company of PIMCO.

CMR2018-1105-363406

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