Fundsters pondering new product opportunities should read the latest column from Morningstar's John Rekenthaler
. Rekenthaler ponders
why interval funds, a kind of compromise between the closed-end and open-end mutual fund strucutures, have failed to gather lots of investor flows in the 25 years since the structure debuted. They account for 0.06 percent of current U.S. mutual fund industry AUM.
Rekenthaler argues that it is cost, visibility, not enough flexibility, and performance that have thus far kept interval fund fever from spreading too far. His recipe for interval funds making it is to cut fees (to a point that will only be profitable at higher asset levels), start a trade group and get a big fund firm on board, and get lucky on the performance side in a way most interval funds haven't in recent years.
Interval funds redeem at NAV, like open-end funds, yet they only do so monthly or quarterly, giving them greater investing flexibility to put money into less liquid ideas. That makes interval funds ideal for real estate investing and liquid alternatives, strategies that sometimes sacrifice a bit to fit into a more liquid open-end mutual fund structure.
Part of the problem, as Rekenthaler notes, is luck: specifically, the nine-year bull market we're in, which hasn't been friendly to alternative strategies and their purveyors. But if some interval fund shops aggressively price their wares, team up for a trade group, and get a titan or two on board, perhaps the next rough patch in the markets could be the time for interval funds to finally make a big splash.
Neil Anderson, Managing Editor
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