Morningstar - Q2 2022 - 49

EXHIBIT 2
EXHIBIT 3
Largest Funds Of the 10 largest interval funds, five are fixed-income strategies;
each of these has yields of 5% or higher.
Name
Cliffwater Corporate Lending I CCLFX
Griffin Institutional Access Real Estate A GIREX
Bluerock Total Income+ Real Estate A TIPRX
Fund Size ($B)
Global Broad
Category Group
Morningstar
Closed-End Category
5.68 Fixed Income High-Yield Bond
5.16 Equity
4.40 Equity
Versus Capital Multi-Manager Real Estate Income I VCMIX 2.96 Equity
Pimco Flexible Credit Income Inst PFLEX
Versus Capital Real Assets VCRRX
CION Ares Diversified Credit A CADEX
Variant Alternative Income Institutional NICHX
Pimco Flexible Municipal Income Ins PMFLX
Carlyle Tactical Private Credit N TAKNX
Source: Morningstar Direct. Data as of 01/31/2022.
Real Estate
Real Estate
Real Estate
2.65 Fixed Income Multisector Bond
2.50 Allocation World Allocation
2.09 Fixed Income Bank Loan
1.61 Alternative
Multistrategy
1.08 Fixed Income Muni National Intermediate
1.04 Fixed Income Nontraditional Bond
2015 2016 2017 2018 2019 2020 2021
Source: Morningstar Direct. Data as of 12/31/2021.
Flows Spike Whether they're seeking
more exposure to private markets
or yield, investors poured into interval
funds in 2021.
Interval Fund Inflows
Flows
$10.0B
2.5
5.0
7.5
Esoteric yield-based strategies are also a good fit
for the interval fund wrapper. Pioneer offers two
catastrophe-bond strategies, which trade
with low correlations to traditional assets. Many of
the strategies classified as alternatives are also
yield-heavy, like Variant Alternative Income NICHX.
This strategy pushes into areas like litigation
finance, music royalties, and trade finance.
Of the 15 equity interval funds, 11 focus on
real estate. The interval fund wrapper allows for
easier access to direct real estate, as well as
illiquid REITs. Real estate is a sizable position in
two of the seven allocation strategies, too,
including Principal Diversified Select Real Asset
PDSYX, which not only holds direct real estate
but also investments in private funds like
timberland and infrastructure strategies. Although
not common, investments in private funds are
another advantage of the interval fund structure,
allowing further access to unique strategies
otherwise not available.
Beneficiaries of the Low-Rate Regime
Although the $40 billion invested in interval funds
represents a fraction of the $300 billion closed-end
fund market, two key investment trends are
a tailwind: the hunt for yield and the move to
private markets.
The search for income has been at the forefront of
investors' minds in an era of low interest rates.
Fixed-income managers with yield mandates have
been pushed further out on the risk spectrum
and into new and developing sectors, where the
debt instruments can be complex and thinly traded.
Interval funds allow managers to build an entire
portfolio of these assets, whereas a manager who
needs to worry about meeting daily redemptions
must make liquidity a bigger factor. A glance at the
trailing 12-month yield for interval funds shows
that managers are taking advantage. Of the 53
interval funds with yield data, 38 (72%) have yields
higher than 4.5%, which was the average yield of
mutual funds in the high-yield bond category
( EXHIBIT 1 ).
Private equity interval funds have yet to take off,
but private credit strategies have had more luck.
Four of the top five fixed-income interval funds in
terms of assets under management contain
significant stakes in private credit. These strategies
also touch the income conundrum; all have yields
of 5% or higher. Although some of the extra
income that these strategies can generate comes
from their ability to access the illiquidity premium,
investors must also be mindful that it may
represent added risk. EXHIBIT 2 lists the 10 largest
interval funds by assets under management.
These dynamics helped drive more than $9 billion
worth of inflows to interval funds in 2021,
more than double the previous high-water mark
( EXHIBIT 3 ). Already in 2022, the funds have taken
in an additional $1.8 billion in new money, with
$640 million of that coming from the Cliffwater
Corporate Lending strategy. Asset managers
have responded to the newfound demand, with 29
new fund launches in the past three years.
Worth It?
Interval funds can offer investors exposure to
return streams they otherwise couldn't access.
Unfortunately, these funds that toe the line
between the public and private markets are often
priced closer to their private-market peers.
Just four funds cost less than 1%, and 32 charge
more than 2%.
These price tags set a high bar for success.
ARK Invest's move into interval funds will shine
a new light on the space, much like how
the firm's success with its active ETFs placed those
funds in the spotlight. Here's hoping that
increased attention leads to more-affordable
options for investors. K
Bobby Blue is a senior manager research analyst at
Morningstar Research Services.
morningstar.com/products/magazine
49
https://www.morningstar.com/cefs/xnas/nichx/quote https://www.morningstar.com/cefs/xnas/pdsyx/quote https://www.morningstar.com/cefs/xnas/pdsyx/quote https://www.morningstar.com/authors/2235/bobby-blue http://www.morningstar.com/products/magazine
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