Glossary of Interval Fund Terms

1-YEAR RETURN

The 1-year return, also called “annual return,” is the amount of money made or lost on an investment over the preceding 12 months. This is a good short-term indicator of an investment’s performance, and it can be expressed in terms of change in dollars or percentage gain or loss from the investment’s initial value. Investors may sometimes see the “year-to-date return” as well, which expresses gain or loss since January 1st of the current calendar year.

12B-1 FEE

12B-1 fees, named after the SEC code that allows them, encompass both service fees and distribution fees (explained below). The fund’s summary of fees may roll both into one “12B-1 fee” category, or it may break the fee down into its constituents.

ADVISOR

An investment advisor, also called a “stockbroker” or “investment manager,” is a person or company that provides investment analysis, recommendations, or active management in exchange for a fee. In the context of a fund, the advisor oversees selection of the securities in which the shareholders’ money is invested. The advisor can be found on the first page of the fund’s prospectus.

ADVISORY FEE

The advisory fee, also called “management fee,” is paid to the fund’s advisors, usually as a percentage of the total dollar value of the assets the fund manages. This fee covers the salaries of the fund’s employees, as well as any overhead involved in research and operations. The size of this fee varies, but it’s usually between 0.5% and 2% of total assets.

ANNUAL REPORT

The annual report is a filing that funds must provide to their shareholders each year, detailing their financial operations and data from the past twelve months. These are made public after a short period of time, and they can be a useful snapshot into the fund’s short-term performance across different metrics. The annual report, along with the semiannual report, are filed with the Securities and Exchange Commission as forms N-CSR and N-CSRS, respectively.

BROKER COMMISSION

A broker commission is a specific type of sales charge that is paid to the broker, who acts as an intermediary between the person purchasing the shares and the securities exchange where the shares are listed. Commonly used brokers are TD Ameritrade, Fidelity, and Charles Schwab. Since the late 2010s, most brokerages have stopped charging fees for purchasing securities, making broker commissions increasingly rare.

CATEGORY

A fund’s category is its broad classification according to its investment goals and strategies. Although there isn’t a standardized list of fund types, they usually fall under two categorization schemes: assets targeted or management objectives. “Assets targeted” categories denote the type of securities that the fund holds, such as stocks or bonds, as well as the size of the companies for equity or time to maturity for fixed-income instruments. “Management objective” fund categories differentiate by the goals of the fund; these can include growth, value, or current income generation.

CLASS

In the context of interval funds, the “class” refers to the type of share offered by the fund. Classes can differ from one another in their fees, minimum investments, and underlying investments. Some common share classes you may encounter: institutional, investor, A, C, U, and W. Each of these classes will mean something slightly different for each fund, so be sure you compare them in the “expenses and fees” section of the fund’s N-2.

CLOSED-END FUND

"Closed-end fund" is a loose denomination used by the Securities and Exchange Commission to describe a fund that is registered under the Investment Company Act of 1940 and is not required to constantly repurchase its own shares from investors. "Closed-end fund" nearly always refers to traditional closed-end funds, also called "closed-end mutual funds" or "CEFs," whose shares are offered once by the fund at an initial public offering and thereafter must be purchased on a secondary market. Though interval funds are technically classified as "closed-end," this categorization is more confusing than useful. Interval funds offer their shares continuously and shareholders can redeem their shares for cash occasionally, making interval funds more "open-end" than "closed-end."

CURRENT YIELD

Current yield is the annual income of an investment ­– from either interest or dividends – divided by the current price of the security. For fixed-income investments like bonds, this is a useful metric for what the investor can hope to earn from the asset over the next year, normalized to include the current price of acquiring it.

DISTRIBUTION FEE

The distribution fee, also occasionally rolled into the “12B-1 fees” category, covers the cost of marketing and selling shares, printing and sending materials to investors, and general advertisement. Like the service fee, it’s usually less than 1%.

EARLY REPURCHASE FEE

This fee, which is more common than the regular repurchase fee, is applied when investors sell their shares back to the interval fund before they’ve held them for a given amount of time – usually a year. It exists to incentivize investors to hold their shares for the longer period of time necessary to see significant yield, and to compensate the fund for the difficulty of liquidating some of its holdings. This fee, combined with the regular repurchase fee, can’t exceed 2%.

EFFECT

An interval fund’s “effect” is the day that its shares are first available for purchase. Because the creation of a new fund requires several rounds of correspondence with the SEC and possible revision to the fund’s fundamentals, the effect date may be weeks or even months after the filing of the first N-2.

FUND WEBSITE

For an interval fund, the fund website is the first stop in the process of acquiring shares. Because interval fund shares can only be transacted directly with the advisor, the management company’s website may have a portal or investor login for buying shares and learning more about the fund’s redemption timeline.

GROSS EXPENSE RATIO

The gross expense ratio, sometimes called the “audited gross expense ratio” or just the “total operating expenses,” is the total cost of operating the fund divided by the dollar value of the assets the fund manages. This is calculated to include all of the abovementioned fees, plus any additional expenses the fund may have incurred. It doesn’t include the rebates to shareholders that the fund may give through fee waivers or expense reimbursements. The size of this fee varies considerably based on the fund’s performance.

ILLIQUID ASSETS

Illiquid assets are investments that are difficult to convert into cash without selling them for less than their market value. These assets are often invoked in the context of interval funds because they’re a common holding for closed-end funds like interval funds. Examples of illiquid assets include real estate, infrastructure, hedge fund shares, private equity, and collectibles.

INITIAL FILING

An interval fund’s “initial filing” is the date on which its N8-A and first N-2 are filed with the Securities and Exchange Commission (SEC). This date is followed by a comment period and a series of revisions before the effect date, on which the fund can start selling shares.

INVESTMENT COMPANY ACT OF 1940

The Investment Company Act of 1940, sometimes referred to as the “’40 Act,” is legislation passed by Congress in 1940 to regulate the organization and operation of publicly traded investment companies. These companies include both closed-end and open-end funds, including interval funds, ETFs, mutual funds, and traditional closed-end funds. The mandates of the ’40 Act, which set reporting standards and outline acceptable investing and advertising practices, are enforced by the Securities and Exchange Commission (SEC).

LEGAL TEAM

A fund’s legal team is responsible for providing the expertise necessary to navigate SEC filings, securities acquisition, and any unforeseen litigation that may arise. There are firms that specialize in investment management law, and it’s not uncommon for a single firm to advise many different investment companies at once. A fund’s legal team is usually noted at the top of its prospectus.

LIQUIDITY

An asset’s “liquidity” is a measure of how easily it can be converted to cash without selling it for less than its market value. Cash itself is the most liquid asset, while investments like real estate and collectibles that take time and effort to sell are considered less liquid. In the context of an interval fund, liquidity refers to the ability of the fund to meet its financial obligations with the assets it owns. For instance, a fund has low liquidity when its pool of money is invested in hard-to-sell assets like private equity and infrastructure. Because interval funds don’t need to constantly buy back shares with cash, they have low liquidity requirements. The opposite of liquidity is “illiquidity.”

LIQUIDITY PREMIUM

The liquidity premium, also called the “illiquidity premium,” is a core advantage to interval funds and other types of closed-end funds. Illiquid assets – investments which have a high financial or time barrier to buying or selling – tend to have higher yields to compensate for the difficulty of acquiring them. Because interval funds don’t regularly need to have cash on hand to buy back shares from investors, they have high limits on the proportion of illiquid assets they can hold. The high percentage of illiquid assets in a typical interval fund’s portfolio provides its relatively high yield, providing a financial “premium” over similar, more liquid securities.

NAV CHANGE

A fund’s “NAV change” refers to the change over time of its net asset value, or NAV. NAV change can be expressed as a percentage of an established starting value or as a dollar amount. Depending on the period over which the change is measured, it can serve as a valuable indicator of the fund’s short- or long-term performance. However, because NAV is calculated by dividing a fund’s net assets by the number of shares it has issued, changes like investor sell-offs and increases in share issuance can influence NAV change independent of the value of the fund’s underlying holdings.

% and $, see “Net Asset Value”

NET ASSETS

A fund’s “net assets” is the total dollar value of a fund’s assets (things that are worth money) minus the value of its liabilities (the things that will cost the fund money). The figure represents the total pool of money invested in the fund. This is sometimes called the “net asset value,” which can lead to confusion. Most of the time, when “net asset value” or “NAV” is invoked, it refers to the “net asset value per share” (below).

NET ASSET VALUE (NAV)

Net asset value per share, usually called “net asset value” or “NAV,” is a ratio of fund’s net assets to the number of shares it has issued. The term “NAV” almost always refers to this figure, which functions as a share price for most funds. For an interval fund, the per-share net asset value is calculated at the end of every day. It’s the price at which shares can be bought and sold, and it’s a handy indicator of the fund’s performance over time. If NAV is increasing, the value of the fund’s investments is growing.

NET EXPENSE RATIO

The net expense ratio, sometimes called the “net operating expenses,” is the figure that actually reflects how much investors are paying to keep their money in a fund. It is calculated as a percentage of total assets under management after fee waivers and reimbursements are factored in, so the net expense ratio percentage reflects how much of an investor’s money is being paid to the fund. For interval funds, you can expect this figure to be between 1% and 5%.

PROSPECTUS

A prospectus is a formal summary of a fund’s offerings, written in plain English and filed with the Securities and Exchange Commission (SEC). It includes the fund’s name, the advisor’s name, the types of securities the fund is offering, the fund’s objectives and strategies, as well as a host of other descriptive information. If the fund doesn’t have a fact sheet, the prospectus is a good place to find its essential details.

REPURCHASE FEE

This fee -- also called the “back-end load,” the “deferred sales charge,” or the “redemption fee” -- is applied when the interval fund repurchases shares from the investor during the repurchase period. This fee can’t exceed 2% of the total proceeds of the sale, and it’s uncommon for an interval fund to charge any repurchase fee at all.

SALES CHARGE

This fee, also called the “front-end load,” is an initial charge applied at the time a person purchases a fund’s shares. It’s charged as a percent of the total amount being invested, and it’s paid to the financial intermediaries that facilitate the sale to cover their operating costs. The size of this fee varies considerably, but it’s usually less than 5% of the amount a person is investing.

SEC INDEX SITE

A fund’s SEC index site is the website at which all of the fund’s filings with the Securities and Exchange Commission (SEC) can be accessed by the public. These filings can most easily be accessed using the EDGAR search tool, which can parse funds by their names, tickers, CIK numbers, or names of people associated with them.

SERVICE FEE

The service fee, sometimes called the “shareholder servicing fee,” is occasionally rolled into “12B-1 fees” category. The service fee covers the costs associated with responding to general inquiries and shareholder requests for information. It’s usually less than 1%. 

STAGE

A fund’s “stage” refers to its current status in the regulatory lifecycle of a fund. For instance, if a fund has submitted its initial filings but has not begun selling shares, it’s in the “recently filed” stage. If it’s actively selling shares and investing its assets, it’s in the “active” stage. Funds can also be in the “deregistered” stage if they’ve filed for dissolution, as well as several others relating to their standing in the eyes of the SEC.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

An interval fund’s “statement of additional information,” also called its “SAI,” is a section of the fund’s N-2 or 486BPOS that elaborates and expands upon fundamental information outlined in the fund’s prospectus. This can include in-depth explanations about the fund’s investment strategies, background on the fund’s officers, or details about the fund’s fee and management structure. The SAI is usually found after the prospectus.

STRATEGY

An interval fund’s “strategy” refers to the high-level classification of its investment tactics, usually by asset class or company size. Common interval fund strategies include: “credit,” in which the fund focuses on structured credit or debt securities; “real estate,” in which the fund focuses on real estate investment opportunities and securities; “private companies,” in which the fund purchases equity and debt offerings from private firms; and “infrastructure,” in which the fund focuses on real assets or securities related to physical infrastructure.

TICKER

A fund’s ticker, also called its “ticker symbol,” is the three- to five-letter acronym that represents the fund in shorthand on a public exchange. If a fund’s shares are publicly traded, it will almost always have a ticker to avoid using sometimes cumbersome or abstruse fund names. A fund’s different share classes will each have their own tickers, which usually differ by a single letter. Funds listed on the New York Stock Exchange can have up to four letters in their tickers, while funds listed on Nasdaq can have up to five.

TOP HOLDING

A fund’s “top holding” is the single security or asset that represents the greatest proportion of its total pool of invested money. The top holding is usually accompanied by a percent figure denoting how much of the fund’s total assets are represented by its investment in that holding. Although most funds invest in a wide range of securities, they will often focus more of their resources on investments that seem particularly low-risk or high-yield. However, it’s uncommon to see a fund’s top holding represent more than 5% of the fund’s total asset value.

TOTAL RETURN

A fund’s “total return” is the actual rate of return made on an investment in the fund over a period of time. This figure is expressed as a percentage, representing the amount of extra money that was made divided by the size of the initial investment. Total return factors in both yield from interest or dividends and capital gain from the investment appreciating in value over time. “Total return” usually refers to the gross total return, which is the rate of monetary gain before taxes and fees. However, it can also be expressed as net total return, which factors in loss from taxes and fees and is sometimes significantly lower.

TOTAL ASSETS

A fund’s “total assets” is a summation of all its holdings that are expected to make money in the future. It doesn’t take the fund’s liabilities, which are holdings that are expected to cost money, into account. Therefore, “total assets” don’t give a holistic view of the value of a fund in the way that “net assets” do.