Not All Investment Funds are Created Equal
There are a variety of fund structures available to buy public and private investments. However, each of the investment structures available have different product features that may appeal to a different segment of investors. This article outlines a variety of fund structures available to investors and the benefits and constraints of each structure.
Mutual funds have historically been the most popular way that US investors pooled their money to make investments. There are almost 10,000 regulated open-end mutual funds 1 with more than $29 trillion in total assets in the US. 2 More than 100 million individuals in the US own mutual funds.
Mutual funds are not traded on stock exchanges. Instead, investors buy and sell shares in a mutual fund by directly interacting with the mutual fund company (or through a financial advisor, a corporate 401k retirement plan or an online brokerage platform).
By rule, mutual funds are bought and sold at the fund’s net asset value (NAV), which is the value of all of its investments (less liabilities and expenses), as calculated at the end of the day.
Mutual funds can effectively cover most, but not all, asset classes including domestic and world equities, bonds, real estate, most investment sectors and passive or index investing styles.
Exchange Listed Closed-End Fund
An exchange-listed closed-end fund is an investment fund whose shares are listed on a stock exchange and traded just like a stock. The market price of a closed-end fund fluctuates throughout the day like that of any of other publicly traded security. The market prices usually trade at a discount (or, in some cases a premium) to the fund’s net asset value per share.
The term “closed-end” refers to the fact that the fund does not issue additional shares of the fund in the normal course of business. A mutual fund issues and redeems shares of the fund every day, as investors buy in or sell out of the fund. So, the number of shares in a mutual fund is “open-ended”. By contrast, a closed-end fund does a one-time initial public offering of shares and then those shares are traded between investors on a stock exchange.
Because closed-end funds do not need to maintain cash reserves or sell securities to meet redemptions, the fund has the flexibility to invest in less-liquid securities.
An interval fund is technically a closed-end fund but with attributes of both a closed-end fund and a mutual fund. Unlike closed-end funds, interval funds do not trade on a stock exchange. Interval fund shares are continuously bought and sold by interacting with the fund company (typically through a financial advisor or a brokerage firm). Similar to mutual funds, interval fund shares are required by law to be bought and sold at the fund’s end of day NAV.
What makes an interval fund unique is that an investor can buy shares in an interval fund at any time, similar to a mutual fund, but an investor cannot sell the shares back to the interval fund at any time. Instead, interval funds repurchase shares from investors under a mandatory repurchase program at predetermined intervals – which are typically quarterly.
One of the most beneficial qualities of interval funds is that they tend to invest in a diverse range of assets, which may not be held in other types of funds. For example, interval funds can invest in illiquid assets, such as private companies, farmland and forestry land, and other private investment types or securities, such as business loans and private equity funds. In exchange for accepting a lower degree of investment liquidity, investors may earn higher returns than those generated in the public markets – this is often referred to as the “illiquidity premium.”
Interval funds are designed to fill the gap between traditional, public open-end funds and private funds with some features of each.
Interval fund offerings are growing at a rapid pace in the mainstream market and receiving renewed attention from fund companies and advisers alike who are seeking increased product and portfolio diversification while providing wider access to less-liquid, longer-term investments that typically make up interval fund portfolios.
A tender fund is also a type of closed-end fund, similar to an interval fund. However, a tender fund conducts periodic tender offers to repurchase shares of the fund on a discretionary basis, whereas an interval fund conducts tender offers to repurchase shares on a mandatory basis.
Tender funds are typically only available to accredited investors or qualified purchasers and require the completion of subscription documents by every investor. Additonally, tender funds are typically not eligible to trade on the standard mutual fund trading platform (Fund/SERV), but rather tender fund transactions are effected on the more cumbersome DTCC Alternative Investments Platform.
A private investment fund is an investment company that does not solicit capital from retail investors or the general public. Members of a private investment company typically have deep knowledge of the industry as well as investments elsewhere. To be classified as a private fund, a fund must meet one of the exemptions outlined in the Investment Company Act of 1940. The exemptions within the 1940 Act are frequently used to establish a fund as a private investment fund. There is an advantage to maintaining private investment fund status, as the regulatory and legal requirements are much lower than what is required for funds that are publicly registered.
1 One feature unique to mutual funds is that they can have multiple share classes. While there are approximately 10,000 mutual funds, there are more than 30,000 mutual fund ticker symbols due to multiple share classes.
2 Regulated open-end funds include mutual funds, ETFs and institutional funds. Investment Company Fact Book 2021.[/et_pb_text][et_pb_image src=”https://primarkcapital.com/wp-content/uploads/2021/06/Table.png” alt=”Fund Structure Comparison” title_text=”Fund Structure Comparison” show_in_lightbox=”on” force_fullwidth=”on” _builder_version=”4.7.7″ _module_preset=”default” module_alignment=”left”][/et_pb_image][et_pb_divider _builder_version=”4.7.7″ _module_preset=”default”][/et_pb_divider][et_pb_text _builder_version=”4.7.7″ _module_preset=”default” text_line_height=”1.5em” header_text_color=”#001641″ header_3_text_color=”#001641″ header_4_text_color=”#001641″ header_5_text_color=”#001641″ header_6_text_color=”#001641″ text_font_size_tablet=”16px” text_font_size_phone=”14px” text_font_size_last_edited=”on|phone” header_font_size_tablet=”28px” header_font_size_phone=”26px” header_font_size_last_edited=”on|desktop”]
Characteristics of funds based on information from the following source: IU.S. Securities and Exchange Commission, https://www.investor.gov/introduction-investing/investing-basics/glossary/interval-fund and https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-92
Investors should carefully consider the Fund’s investment objectives, risks, charges, and expenses before investing. This information is included in the Fund Prospectus should be read carefully before investing. The Prospectus is available through the Prospectus link on the Primark website: Primark Prospectus. Please read the Prospectus carefully.
An investment in the Fund is subject to, among others, the following risks:
- The Fund is not intended as a complete investment program but rather the Fund is designed to help investors diversify into private equity investments.
- The Fund is a “non‑diversified” management investment company registered under the Investment Company Act of 1940.
- An investment in the Fund involves risk. The Fund is new with no significant operating history by which to evaluate its potential performance. There can be no assurance that the Fund’s strategy will be successful.
- Shares of the Fund are not listed on any securities exchange and it is not anticipated that a secondary market for shares will develop.
- Shares are appropriate only for those investors who can tolerate a high degree of risk, and do not require a liquid investment.
- There is no assurance that you will be able to tender your shares when or in the amount that you desire. Although the Fund will offer quarterly liquidity through a quarterly repurchase process, an investor may not be able to sell or otherwise liquidate all their shares tendered during a quarterly repurchase offer.
- The Fund’s investment in private equity companies is speculative and involve a high degree of risk, including the risk associated with leverage.
Distributor: Foreside Financial Services LLC
App. Lit. No. PRMKPF-2021054-0041. PRIMARK FUND OVERVIEW 2021. 2021 Primark Capital. All Rights Reserved.