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Why we are using Interval Funds like Pimco Flexible Credit Income and Rivernorth Market Opportunities

Clients who own shares of Pimco Flexible Credit Income or Rivernorth Market Opportunities may have received a notification from Schwab or T.D. Ameritrade.

Unless you have an immediate need for funds (we should already know this so that’s unlikely), you don’t need to take any action. The funds have to tell you this because of the way they are organized (more later).

In our mission to find the best fixed income investments for our clients, Joey and I visited with managers in Chicago, and I flew to New York last week. This confirmed what I learned at an Atlanta RIA conference in December of last year and the information we gathered from the Chief Economist of Pimco in February.

We believe rates will rise. Because the prices of long duration bonds fall when rates rise, we want to avoid this. But corporate bonds are overpriced. This leaves us in a conundrum.

Gaining exposure to middle market loans (and special situations) resolves this. Middle market loans are loans to companies with $30-$100 in earnings. These companies need financing for growth but are unable to gain financing from banks until they reach $100 million in earnings.

Venture capital and private equity financers lend to these companies but would prefer to be investing in equity. This leaves a hole for us to fill.

These are the companies that were often started by angel investors and funded by venture capital. These are the small businesses that are the lifeblood of our country. The angel and venture capital investors who put up equity to get these companies started are now forced to lend to them (when they prefer higher risk higher return equity financing).

Remember the big banks won’t lend to them.

But you now can.

That’s what these funds allow you to do.

Which means, not only can we invest in something that we feel will offer a very good return for a reasonably low risk, but we can also help the US economy and create jobs and opportunities for our kids and grandkids! This is a win/ win!

As a bonus, many of these funds simply are not available at the big banks and insurance companies because they don’t have sales agreements. The funds are size constrained and will likely soft close, then hard close, in the next year or two.

Remember Grandeur Peak?

We don’t expect returns as high as that, but we do expect these funds to deliver superior performance (at a reasonable risk) to bond indexes and typical bond funds.

Anyway, now to details on how the funds work.

Interval funds look like open ended mutual funds. They are priced daily at net asset value but may not be listed on an exchange. You will generally see the price rise or fall when a dividend is paid. They differ from other funds in that they do not trade on a secondary market. Instead, they allow investor to sell shares back to the fund on a periodic basis. The repurchase is typically limited between 5% and 25% of shares outstanding. If repurchases required are above the repurchase amount, investors may only receive a portfolio of their requested redemption, and may have to redeem over a period of several quarters. Because these funds invest in private securities, the due diligence is more difficult and fees are higher.

We also recognize that there may be some occasional problems with the accounting for these but know that these will be temporary in nature, and resolved at the custodian level.

If you have any questions about this, contact us and we will be happy to talk about it.

We also invite you to read this blog on bank lending: If you don’t mind being “Cross Sold” by the big banks, don’t read this

 

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Ken’s focus is on investment strategy, research and analysis as well as financial planning strategy. Ken plays the lead role of our team identifying investments that fit the philosophy of the Global View approach. He is a strict adherent to Margin of Safety investment principles and has a strong belief in the power of business cycles.
On a personal note, Ken was born in 1964 in Lexington Virginia, has been married since 1991. Immediately before locating to Greenville in 1997, Ken lived in New York City.

Categorized: Economic Commentary , Financial Planning , Global Financial Markets , Uncategorized