(Bloomberg) -- First Eagle Investments plans to launch a product investing in higher-yielding municipal bonds with a twist: investor withdrawals are limited to a few times per year.
The Tactical Municipal Opportunities Fund will invest at least 75% of its assets in bonds rated BBB or lower as well as unrated debt. The First Eagle interval fund may also target as much of 25% of assets in “special situations” municipal securities, debt of issuers that are in default, bankruptcy or other financial distress, according to a Dec. 31 preliminary prospectus filed with the US Securities and Exchange Commission.
In First Eagle’s bid to expand its reach under star money manager, John Miller, it joins a boomlet of similar offerings. Assets in interval funds have ballooned almost 40% per year over the past decade, according to Morningstar Inc. Investment firms, pressured by competition from exchange-traded funds, are wooing investors with the allure of outsized returns to the higher-fee products.
Growth in interval funds has been driven by fixed-income assets, particularly private credit and corporate loans that can’t easily be converted to cash.
Sixteen bond interval funds opened in 2024, including three municipal funds, according to Morningstar Direct data. Rockefeller Asset Management and Lord Abbett & Co. launched their muni interval funds near the end of last year while MacKay Shields started a long-term national fund in March.
By limiting withdrawals to regular periods and percentages, interval funds allow retail investors to get access to more illiquid — and potentially higher-returning assets — while reducing the risk a wave of investor redemptions will trigger fire sales. Restricting share sales has a tradeoff of course as investors’ funds will be tied up for longer.
The structure makes sense for lower graded and unrated municipal bonds, which are the most illiquid category of state and local government debt and may not be suitable for open-end funds which have to fulfill shareholder sales on demand.
“The high-yield muni market is extraordinarily fragmented,” Brian Moriarty, Morningstar Inc.’s associate director of fixed-income manager research, said in a telephone interview. “Most of the loans are very small. Most of the loans are held by one asset manager. They don’t really trade that much — so it works really well.”
Asset managers benefit because they can charge more to analyze and pick securities that will beat the market, while providing a more stable revenue stream, he said. Since it can take years to fully withdraw money from an interval fund, investors should have the means and flexibility to endure long holding periods.
Despite the rapid growth, such products remain a small corner of the market. At $82 billion, interval funds of all stripes — including fixed income, bank loan, equity and real estate interval funds — comprise a fraction of the $120 trillion held by money managers.
There were eight municipal bond interval funds with $2.7 billion in assets as of Dec. 31, according to Morningstar. The oldest was established by Lind Capital Partners in 2017.
Using Leverage
The Tactical Municipal Opportunities fund will offer to buy back shares from investors quarterly.
The percentage of shares it will repurchase hasn’t been disclosed yet, but typically interval funds will buy back 5% of shares per quarter, according to Morningstar.
Pholida Barclay, a First Eagle spokeswoman declined to comment.
The muni interval fund will be permitted to use leverage, with as much as 33% of assets coming from borrowing. Leverage boosts returns when prices rise, but sharpens losses when they fall.
First Eagle will charge a management fee of 0.9% on total assets, which includes securities purchased using leverage.
“This practice can directly incentivize an asset manager to leverage a fund because it increases the fees they can collect, even when doing so is not appropriate for the current market environment, the underlying assets or investors expectations,” Moriarty wrote in a June 2024 report.
First Eagle’s offering is the second new muni fund the investment company registered in December.
In addition to its high-yield muni interval fund, First Eagle is planning to launch a Core Plus Municipal Fund that will focus on higher-quality state and local-government debt. It will be permitted to invest as much as 30% of its net assets in junk or unrated securities.
The firm currently offers a high-yield open end muni fund that’s amassed $5 billion in assets in its first year, as well as a short-duration high-yield fund.
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