Interval Funds Versus Mutual Funds

Transcript:

Jared Kizer: All right. So today I'm going to talk about what are known as interval funds or the interval fund structure and contrast that to the more commonly known structure, the mutual fund structure. So in a past video, I talked about the differences between exchange-traded funds and mutual funds. I'm going to explore kind of a similar type of concept comparing what are known as interval funds compared to mutual funds.

What Are Interval Funds?

Jared Kizer: So interval funds, what are they? Certainly not as common. Rewind the clock back ten years ago, this was a type of fund that not even a lot of investment professionals were aware of, but you are seeing it become a lot more prominent over the course of the 2010s into the 2020s. So let's start by talking about what are the similarities between interval funds and mutual funds. And then probably more notable, the differences. And then when we cover those differences, what are the reasons why you would ever consider allocating to a fund that's in this type of structure.

What Are the Similarities Between Interval and Mutual Funds?

Jared Kizer: So similarities. The first point to note is that both are SEC-registered fund structures. So the SEC is kind of the regulatory body or one of the regulatory bodies for financial markets and both the mutual fund structure and the interval fund structure are SEC-registered fund structures and I’m saying that because to note that these are not private fund structures so the interval fund is an SEC-registered structure. Another similarity, while this is not true for all interval funds, by and large most interval funds that are out there in the marketplace can be purchased on a daily basis, ust like a mutual fund can. So I think those are the two similarities that are most notable that come to mind.

There Are Notable Liquidity Differences in the Funds

Jared Kizer: So let's move on to the differences, which I think are the most notable things to understand about interval funds contrasted with mutual funds. So interval funds cannot be sold on a daily basis. Probably the most notable feature of mutual funds is the ability to sell your entire position if you want to every single day. That feature does not exist with an interval fund. Most commonly, most interval funds can be sold once per quarter as opposed to daily. So big, big difference there in terms of how frequently they can be sold. Other notable liquidity difference is that even though most interval funds can be sold once every quarter, there is a chance that you might not be able to sell your entire position that you want to sell in a particular quarter. That's known within our world as the fund being pro-rated. So there are some notable liquidity differences there, meaning interval funds are certainly only appropriate for very long-term committed investors because you do have these differences.

What Are the Advantages of Interval Funds?

Jared Kizer: So with those differences noted and those basically being liquidity focused, what are the potential advantages? Why would you ever then consider allocating to an interval fund versus the more common mutual funds that are oriented around traditional stock and bond strategies? Well, the big reason is that you find that there are asset classes that are able to be invested in the interval fund structure that simply don't exist in mutual funds. So there are, for example, private credit as an asset class, which we think can make sense for some clients as an asset class because it's private in nature, meaning these aren’t publicly traded bonds. It's just an asset class that tends to be a lot less liquid than the traditional bond market, and therefore there's no way to invest in that asset class in the mutual fund structure. So if that's an asset class, for example, that you think might be appealing or might add some diversification to your stock and bond portfolio, really the only way or one of the only ways to access that would be through the interval fund structure. So that's the biggest advantage. That's the reason that we're starting to see the structure gain some prominence is because it's bringing asset classes to the investable marketplace that simply don't exist in traditional mutual fund or exchange-traded fund structures. And that can make sense in return for understanding those liquidity considerations.

So hopefully this is a good kind of brief review of what interval funds are, how they compare to mutual funds. If you have additional questions you'd like for us to tackle, feel free to reach out to your advisor. Suggest those topics or click the link below and submit questions in that way. Thanks.

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