What are Alternative and Interval Funds?

Episode 12 - 

Title - What are alternative investment options including Interval Funds?

*Sorry for any grammatical errors as this description was generated using AI

Reid Trego hosts a discussion with Justin Pitcock, CFP® professional and wealth management advisor at Goodwin Investment Advisory about alternative investment options. They explore ways to diversify portfolios beyond traditional stocks and bonds, including private real estate and debt. They discuss an Interval Fund structure that allows average investors access to these alternative investment funds while still providing liquidity. The goal is to add resiliency to portfolios by complementing diversified sources of return and risk factors with long-term investments that work towards individual goals. 

If you are interested in alternative investments, please contact Goodwin Investment Advisory and speak to our GIA consultant who can get to know your specific goals and objectives and set up a meeting with one of our CFP® advisors. 

The Money PIG podcast is hosted by Reid Trego.  Goodwin Investment Advisory is a Registered Investment Advisory firm regulated by the Securities and Exchange Commission in accordance and compliance with securities laws and regulations.  Goodwin Investment Advisory does not render or offer to render personalized investment or tax advice through the Money PIG podcast.  The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.

Transcript

Welcome to the Money Pig Podcast, brought to you by Goodwin Investment Advisory, where our mission is to lead people to financial peace, independence, and generosity. I'm your host, Reed Tree. Go. And today on the show, we're joined again by Justin Pitcock, certified financial Planner professional, for a discussion about alternative investment options. We recently have an episode where we talked about what to do with cash right now, here in early 2023. Now we want to talk about some other alternatives because that made us think, wow, we do other things here too. So Justin, thanks so much for being here again. 



Thanks for having me. 



Yes, sir. Okay, so 2022, rough year for stocks and bonds. 



Oh my gosh. It was the worst year on record for the traditional 60 40 portfolio. You've got stocks down 16 20%. You've got bonds down 16%. So what did that teach us? We need additional diversification. And thinking of how we can do this for the average investor has us looking for alternatives. 



I'm glad you said average investor because maybe people know. Don't know, but they look out there and they say, oh, these are rich people, they're investing in private equity. And I have all these things going on. Well, there are these private placement investment types that require accredited investors. That means they have over a million dollars in net worth aside from their main home and maybe make over 250 or $200,000 a year or something like that. They're considered it sounds rude, but the actual term is sophisticated investors. 



You have to be an accredited investor. And so that's the definition around that. Not everybody that we work with has a million dollars of investable assets, but they would still like and still benefit from having access to these alternatives. There's a fund structure called an Interval Fund that allows those people access. 



Great interval fund. So explain to us how that's different from just a really like stock that I'm going to buy or mutual fund. 



Okay, so an Interval Fund is legally a mutual fund, but it has some illiquidity components that traditional mutual funds don't have. The traditional mutual fund allows you to sell it basically every day at the end of whatever the end of day value is. That's the price you get. You can get in or out on any business day. An Interval Fund invests in these alternative investments that are less liquid, so they have quarterly liquidity. You can buy in any one day, but you can only get your money out at the end of each quarter. And these tend to be longer term investments. Some of these funds require that you invest your money for at least twelve months or they charge you an early redemption fee, which is normally 2%, going back to like 2022 when stocks and bonds are down. 



We're looking for added diversification. We've got to go to alternatives to get that, like private real estate, private equity, or private debt. Now, each of those have very different characteristics, very different sources of return and very different risk metrics. And those things can complement your traditional stock and bond portfolio. 



Man, that is amazing. So we're not saying don't invest in stocks and bonds, give up securities forever, but there can be a good case to be made that a little diversification would be. 



What else? Absolutely. So last year one of the private real estate funds that we like was up 8%. Publicly traded real estate was down like 25% as a category. Stocks again down 20, bonds down 16. If you had something that was up 8% last year, I think you'd feel really good about that. 



You'd feel like a winner. 



Private credit was marginally up as a category. One of the funds that we like was up about a half a percent. So nothing to get real excited about. But again, when your bonds are, the main part of the bond portfolio is down. If that was down 16% and you had a 10% position that was marginally up, that's a win. So we know we need to build in better resiliency. And these Interval funds allow the average investor to get access to that. You don't have to be accredited, you don't have to have a million bucks investable assets, although for those that do, this is still a good option. It allows you to get out on a quarterly basis where a lot of other private investments require you to lock your money up for years, maybe even like ten years. 



Private equity is still an asset class that traditionally requires you to lock your money away for about 510 years. You're buying a business venture, there's a turnaround time on that, there's a planned sell in the future. And so folks that invest in private equity are long term investors, your money's locked away and it's actually not a good idea for the average person to buy in because what if you need your money in the next ten years? And how could you even foresee that, right? So that's still kind of for your high net worth folks. But private credit, private real estate, though, that's accessible to basically anybody now. And this Interval fund structure is able to invest in that with a liquidity sleeve where about 20% of the fund is invested in very liquid securities. 



So like publicly traded real estate could be the 20% portion of the portfolio. So 20% is publicly traded real estate, 80% is actual warehouses and apartment complexes, that sort of thing. And so that 20% liquidity sleeve allows you or me to get in and get out kind of as we please. Now it works until all the investors want to get out at the same time. So the fund does have the right to say, I'm sorry, we are not giving people their money back at this point in time. We cannot sell this warehouse or this apartment complex at the detriment of the other investors because it's a good investment. Why would you sell it? 



So they have a clause in there that says on a quarterly basis, if they need it to, they could limit you to withdraw no more than 5% of what you put in. 



Wow, okay. 



And that's on a quarterly basis. So that resets. So every quarter they would be required to give you 5% if there was a liquidity crunch at that point in time under normal market conditions, no problem. You can get your money out on a quarterly basis, no problem. 



So they're going to count on not more than 20% of people ever wanting to pull out all their money. 



Okay. Right. 



Let's break this down and make it really simple because I do talk to a lot of clients. They're like, I want to invest in real estate and think I have a rental property. And that's fine. That can be a good investment as long as you've got all your other ducks lined up first. But what are the different ways to invest in real estate? Because that's really where we're going. This is one of these alternative interval funds that's available. So talk about the different ways that we would like a practical normal person would invest in real estate. 



We talk to people all the time about buying a rental property and I think that's a really common goal. It's a great way to build wealth. You're creating a diversified income stream. You're building equity in that property. And so that's one way is go buy the property yourself. You manage it or hire somebody to manage it and that's direct real estate. Or maybe you don't have hundreds of thousands of dollars that's generally needed to do that. So you could pull your money with your friends, buy an investment property, those better be good friends. But now it's still up to you all to manage that property. 



Right? 



Or you could pull your money together with other investors and have a professional manager. And so that's where this interval structure comes in. You've got a professional manager, other investors coming in and they're buying the warehouses, the apartment complexes. Another big area that we're attracted to is life sciences. So life science companies tend to have long term leases, which makes that an attractive area. When you've signed a lease agreement, you want it to not be where, okay, maybe you're going to have to find a new tenant in a year. Now these are like 510 year leases. So that's an attractive area more resilient during economic hardships because they're locked in for a long time. 



Great, okay, that makes sense. So that's real estate. There's these interval funds with real estate. That all makes sense to me. I love it. And then private credit is another one were talking about or private debt. And these are essentially privately negotiated non bank loans. 



That's right. 



For companies. So briefly talk us through that a little bit. 



The bulk of that market is direct lending. So let's say a business needs money. If they need a lot of money, like hundreds of millions of dollars, they go to an investment bank and they do a bond offering to get that money. There's expenses, there's time, legal fees, regulatory fees, all that to do a bond offering. Well, they can go to a private lender and get that money much quicker generally. So a company, if they don't need hundreds of millions of dollars, they can go to the direct lender and the lender is able to do their due diligence in a shorter period of time. They're able to provide that capital in exchange for those efficiencies. The company that's taking on that debt is willing to pay a little bit higher rate of interest. 



And historically, the difference between these private loans, this private credit and bonds has been about a 4% spread. Right now we're seeing about a ten, maybe a little bit more ten plus yield on private credit as a group. It sounds pretty attractive. 



Yeah, that is awesome. And I appreciate it because these are things that the normal people like us want to know about and we feel like a lot of times it's out of our reach. But it's something that you're amazing. You're always researching things and learning and you seem to I don't know if you read everything every day, somehow you know everything, but you're just super up on things like this. And it's really good for people to know we're not just locked into the stock market and bond market. We have our eyes open looking at other investment strategies that work great for our clients. 



Yes. And so that's the whole goal here, is that we still like the stocks and bonds and that should be the bulk of your portfolio. But if we can add in things like private credit, private real estate as a complement to what you already have, I think that can add in more resiliency. Because again, they're diversified sources of return and have diversified risk factors. From what you've already got, I look at as a great complement to the portfolio. But the drawback is you lose some liquidity. So as long as you've got enough other liquid assets, this could be a great addition to your portfolio. 



That's awesome. And as you mentioned all the time, you're always investing for a goal and retirement is a long term goal. 



That's right. A lot of us do. 



We sit and think, well, I'll need that money when I'm 65. Well, hopefully until you're 95, hopefully you. 



Need it for 30 years and back on that, you need that money. Probably only need like 4% of that money every year. 



Every year, right. 



So the rest of it needs to be growing and working for you. 



Yeah. Well, if you want to learn more about this, reach out to us. We're happy to help explain more about what we're talking about and see if it's right for you as a listener. And so thanks for listening, folks. But as financial advisors, we manage and rebalance portfolios. It's just part of what we do. But the real value is that we work to understand our clients individual goals so we can have these exact types of conversations for planning that are so personal and unique to each individual. Justin, thanks again for being here. 



Thanks for having me. 



The Money Pig Podcast is hosted by Rtrego. Goodwininvestment.com Advisory is a registered investment advisory firm regulated by the securities and Exchange Commission in accordance and compliance with security laws and regulations. Goodwin Investment Advisory does not render or offer to render personal investment or tax advice through the Money Pig Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.