Trends Watch: Interval Funds
December 16, 2021
By Elana Margulies-Snyderman
EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Jeffrey Lapin, Partner and Portfolio Manager, Lord Abbett.
What is your outlook for alternatives?
That depends on your alternatives! We believe there will always be opportunities for talented investors across markets and asset classes. That said, one of the reasons we launched our Credit Opportunities Strategy was that we saw an under-exploited “white space” that existed between private and large-issue credit. When you look at the former, one of the challenges is just how crowded the space has become in aggregate while remaining very “narrow” on a strategy-by-strategy basis. This is something that wasn’t very helpful in a year like 2020, which you could argue was several markets in one that rewarded different investment themes at different times across a compressed time period. The pool of money chasing private deals is large and getting larger, while at the same time stronger private issuers are taking advantage of the current environment to re-finance in public markets. There’s more money pouring in, lots of “product” pouring out. In our view, a strategy that surveys markets broadly to find idiosyncratic opportunities is a good one. Easy to propose, but hard to pull off without significant resources.
Where do you see the greatest opportunities and why?
We see tremendous opportunity across a very inclusive swath of public markets. Like credit, term, or any other risk premia, liquidity premiums change across markets and through time. While all of us in our careers will tend to focus on years like 2008 or 2020, the reality is every year has its challenges, and within those challenges there will be special individual stories. The key is having enough talented eyes to identify those stories and aggregate them into a portfolio of 70-90 ideas. We currently view the portfolio as representing two broad investment strategies: 1) Enhanced carry, where the return is based primarily on income with some price appreciation, and 2) Total return, where our expectation is for catalyst-driven price appreciation to provide a higher proportion of the expected return. An example of the former would be our investments in the BB and B range in collateralized loan obligations (CLOs), which allow us to utilize both our structured debt and senior loan capabilities to uncover opportunity. For the latter, we are focused on credits that we believe will benefit as COVID-19 restrictions continue to loosen. Certain leisure names have performed well in the COVID-19 environment, and we expect they will continue to improve as lockdowns are lifted. We’ve funded these trades with the sale of credits we believe have run their course.
Where do you see the greatest challenges and why?
When you’re scaled to survey a cast of tens of thousands, it’s sometimes difficult to ignore a very good opportunity and save that space for a great one. A part of the reasons we’ve structured our team as we have -- as a Credit Council, with senior experts from across our entire $160 billion taxable fixed income franchise -- is to ensure that we have lots of critical eyes with diverse expertise making a call on a credit-by-credit basis. Everyone on the council “owns” the decision to add a position, and as a consequence we’re able to build a portfolio of ideas that survive that gauntlet rather than simply picking up everything that looks “cheap” or “interesting.”
What advantages are there to the interval fund structure for investors and asset managers?
We’ve heard comments from some practitioners suggesting interval structures “protect clients from themselves.” That’s a very parochial way of looking at it. Investors are smart -- that’s why they have assets to invest. What we would suggest is the structure allows investors to protect themselves from other investors and practitioners who are not longer-term investors. By limiting redemptions, we ensure that the pool of individuals invested in our strategy are aligned -- this is an investment, not a “trade.” As a consequence, investors can have the confidence that asset manager skills and not short-term market sentiment will be the decisive factor in investment performance.
For asset managers, the interval structure gives us some certainty around the timing and magnitude of outflows. That allows us to build a portfolio of what we believe are great ideas with the confidence that their stories will play out without the need to cut them short to satisfy redemptions. We view it as a tremendous advantage and a luxury that, as a firm with an incredibly rich history of deep credit research stretching back 50 years, allows us to practice our craft more fully. The combination of being more liquid than a locked up private credit strategy but more stable in our asset base than a typical mutual fund is powerful -- one need look no further than a year like 2020 to see just how powerful, and we believe we will continue to exploit these advantages fruitfully.
Although there are benefits to an interval fund structure, there are also important considerations that investors must be aware of. The fund offers quarterly repurchases of shares which are typically limited to 5% of outstanding shares per quarter; therefore there is no guarantee that an investor will be able to tender all or any of their requested fund shares in a periodic repurchase offer. For this reason, investors should consider shares of the fund to be an illiquid investment. In addition, the fund’s ability to be fully invested and achieve its investment objective may be affected by the need to fund repurchase obligations.
The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.