Rockefeller Asset Management
A trio of interval funds new to the municipal bond market underscore the growing popularity of this type of closed-end fund as managers look for alternative investments that offer fewer liquidity constraints and the potential for higher returns.
Over the last 15 years, there has been an evolution in the muni market: more issuers, more assets going to the category and more investors becoming comfortable with the way the market flows over time, leading to more diversified approaches and various vehicles, said Dan Solender, a partner and director of tax free fixed income at Lord Abbett.
While an interval fund is a newer type of structure, it operates like an open-end fund.
“You invest any time you want; however redemptions are limited and generally provide money on a quarterly basis, and with defined fund management discretion around the total amount of redemptions that it provides,” said Sean Saroya, managing director and head of public finance trading at J.P. Morgan.
There are currently eight muni interval funds, three of which launched last year: MacKay Shield’s NYLI MacKay Muni Income Opportunities Fund, launched in March, and Lord Abbett’s Lord Abbett Municipal Opportunities Fund and Rockefeller’s Rockefeller Municipal Opportunities Fund, both started near the end of 2024, according to Morningstar Direct.
At the start of the year, First Eagle Investments announced plans to create its first muni interval fund, the First Eagle Tactical Municipal Opportunities Fund.
That would bring the number of muni interval funds up to nine, with more potentially to come.
For Rockefeller, which launched its muni interval fund on Dec. 9, the decision to wade into the interval fund space had less to do with specific market conditions and more to do with muni market dynamics, said Alex Petrone, Rockefeller’s director of fixed income.
“While we believe the current setup for municipals is attractive given high tax-advantaged yields and overall resilient credit fundamentals, the interval fund structure is well suited to the municipal market throughout a cycle,” Petrone said in an email. “By limiting redemptions to quarterly, rather than daily, our investment team can lean more effectively into both complexity and liquidity premiums across the municipal market, aiming to capitalize on market dislocations and seeking to deliver superior returns for our investors.”
The firm plans to maintain an allocation of 60% or greater to lower-rated securities in the portfolio and sees “compelling risk-reward opportunities” in the special assessment and charter school sector, Petrone said. On the investment-grade side, the firm sees value in alternative minimum tax airports and single- and multi-family housing bonds.
“We continuously survey the market to identify the strongest relative value across the entire credit and maturity spectrum,” Petrone said.
The fund will be managed by three managers who joined Rockefeller from Invesco in 2024: Scott Cottier, Mark DeMitry and Michael Camarella.
Interval funds can work for the muni market partly because of the mismatch between credit fundamentals, which tend to be strong and move slowly, and the relatively fragile and fast-moving technical side of the market, said a high-yield portfolio manager who declined to be identified.
By not having to deal with daily redemptions, interval fund managers can buy bonds when others sell and “tap into credit in more of a pure play,” the manager said.
“A potential cap on total redemptions and notification periods enables the portfolio manager to plan ahead, and if you have that certainty, you can potentially buy more distress, more leverage and more special situations, more private placements, more pure play that should enhance total returns and yields,” the manager said.
Lord Abbett launched its first muni interval fund on Nov. 11, its fourth interval fund in five years, Solender said.
“Sometimes you go through inflows and outflow cycles, and there are some very interesting investments that we want to put in our portfolios, but we need to always be prepared in all cycles to provide liquidity of clients needed,” Solender said. “With an interval structure, there’s things we can invest in that are good investments that might be a little less liquid but can provide really attractive yields and returns for our clients.”
Before 2022, when the market was in a lower rate environment, Lord Abbett considered launching a muni fund, believing opportunities were attractive, but at the time, yields were not as attractive, Solender said.
Since then, rates have moved higher and become more enticing, he noted.
When the market experiences a “2022-type environment” with a severe cycle of outflows, there’s a certain part of the high-yield market that’s very liquid, Solender noted.
“You can sell, but you also have to work through some of the less liquid positions because you have to make sure the portfolio is diversified and has enough liquidity,” he said.
In those environments, “sometimes you have to sell bonds” at lower prices despite being good credits due to the need for liquidity, Solender said.
With interval funds, “you don’t have to make investors take as much of an extreme hit on the holdings to get liquidity,” he noted.
And for the investor, interval funds are providing additional yield, Saroya said.
“We’re in an environment where although spreads have compressed, yields are high, and investors remain interested in sourcing max yield,” he said. “This type of strategy allows an investor to potentially earn higher yields by capturing additional liquidity premium in the market.”
While there is currently a small number of muni interval funds, that could change, depending on a firm’s appetite and capabilities.
“You’re seeing that with the success of the existing interval funds and others are entering the space with their own strategies to meet investor demand,” Saroya said.