For investors who can forgo daily liquidity in exchange for higher returns, interval funds may be one answer.
The popularity of interval funds is growing, but many financial advisors and investors are hesitant to jump in, according to two people who deal with this investment sector.
Interval funds are continuously offered, closed-end mutual funds that periodically offer a repurchase of shares, usually quarterly. Investors therefore have some liquidity, limited to 5 percent of the shares per quarter, but this is an investment that is not suitable for those who may need access to their money immediately.
The limited liquidity can be advantageous because it prevents investors from selling on a whim when there is market volatility, says Mark S. Rothstein, owner of TriStar Income Tax and Financial Services in El Segundo, Calif., who uses interval funds in almost all of his clients’ portfolios.
John Snowden, lead portfolio manager for the Resource Real Estate Diversified Income Fund, an interval fund, which is part of Resource America Inc., based in Philadelphia, agrees the limited liquidity removes the emotion from investing. “It makes the investor take a deep breath when there is a market driven event and wait till the next quarter to make a decision.”
Because the funds are held longer, returns are usually higher, says Snowden, who adds that the fund is currently returning 6 percent. The Resource America funds are concentrated in the real estate and corporate credit and debt markets, but can also involve any market segment.
The minimum investment is $2,500, which opens the funds up to the mass affluent market.
“We invest in the highest quality real estate in the country that is managed by top firms—the same type of investments institutional investors are making,” he adds. “We are buying at a discount to the par value, but it may have to run two years to show a return.”
The Resource fund has been out for four years and has a one-third to one-half correlation to market shares, Snowden says.
“Interval funds have been offered for about five years but are still not well known by advisors,” he says. Their popularity is growing because the high commissions on other types of real estate investments are becoming better known, and people are looking for less costly investments.