Funds that restrict withdrawals but give investors access to assets they couldn’t otherwise buy could become more popular.
Most investors can’t buy farmland, like this in Illinois, but they are candidates for interval funds that invest in it. PHOTO: DANIEL ACKER/BLOOMBERG NEWS
Investors may soon be hearing more about interval funds.
With these funds, investors can redeem shares only at specified times or intervals.
Why would an investor want to own one? Because it’s hard for an individual to find another way to invest in the assets these funds hold.
Interval funds typically invest in illiquid assets that aren’t listed on any exchanges, including commercial property such as vast farmland or forestry tracts, as well as private equity and business loans. Few individual investors can afford to buy 10,000 acres of farmland, for instance.
The illiquidity is why these funds don’t offer shareholders the ability to redeem shares daily.
Some researchers think there will be both a need and a demand for exposure to such assets in the near future. Low returns from traditional investments by historical standards will lead to a “steady stream of assets moving into alternative investments,” says a 2016 report from consulting firm McKinsey & Co. “These flows will be redirected heavily toward illiquid private markets.”
Interval funds may also provide a boost for financial advisers in a world where passive investing in funds that track market indexes is the rage.
“What retail investors now hold is largely a portfolio of passive exchange-traded funds, so the alternative-assets domain is how the adviser will add value to the client,” says Kimberly Flynn, managing director of XA Investments LLC in Chicago.
By: Simon Constable (The Wall Street Journal)
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