Pioneer Investments, a U.S. based mutual fund manager with a number of strategies that already include exposure to insurance-linked securities and reinsurance-linked assets, has filed documents with the SEC for a new interval ILS fund, its first dedicated ILS strategy.
An ‘interval’ fund provides investment managers with a way to target a less-liquid portfolio of assets while offering investors liquidity opportunities at regular intervals. In this way the asset manager can retain some control over redemption volumes, while still leveraging less-liquid, often higher return ILS assets.
Pioneer, a long-time manager of ILS assets (with over $1 billion of reinsurance linked under management), is not the first to look to the interval closed-end fund structure as a way to bring less-liquid ILS assets to its mutual fund investors. New York based Stone Ridge Asset Management launched an interval fund in 2013 to invest in less liquid ILS and reinsurance assets such as sidecars and private deals with great success, raising over $760m for the strategy by the end of April 2014.
With yields declining across catastrophe bonds and other reinsurance assets, as a result of the general decline in reinsurance pricing, it has become much more attractive for asset managers to invest in less liquid assets, such as reinsurance sidecars, private quota share reinsurance deals in segregated cells and directly into reinsurance contracts.
In order to manage a portfolio which contains illiquid assets while still offering a mutual fund strategy, being able to offer investors some liquidity while keeping control of redemptions to a degree, the interval fund strategy looks set to become a preferred solution.
The Securities & Exchange Commission (SEC) archive shows that Pioneer first registered the Pioneer ILS Interval Fund on the 6th August, although it was established as a Delaware entity in July 2014. Pioneer then filed a full registration statement on the 24th September with an amendment on the 25th detailing the strategy behind the fund.
The Pioneer ILS Interval Fund will invest primarily in;
“Insurance-linked securities (“ILS”). ILS may include event-linked bonds (also known as insurance-linked bonds or catastrophe bonds), quota share instruments (also known as “insurance sidecars”), collateralized reinsurance investments, industry loss warranties, event-linked swaps, securities of companies in the insurance or reinsurance industries, and other insurance-and reinsurance-related securities.”
In terms of the liquidity intervals that will be offered to investors in the Pioneer ILS Interval Fund;
“Quarterly repurchase offers of no less than 5% and no more than 25% of the fund’s outstanding shares at net asset value (“NAV”). Typically, the fund will seek to conduct such quarterly repurchase offers for 10% of the fund’s outstanding shares at NAV. Even though the fund will make quarterly repurchase offers, investors should consider the fund’s shares illiquid. Repurchase offers in excess of 5% are made solely at the discretion of the fund’s Board of Trustees and investors should not rely on any expectation of repurchase offers in excess of 5%.”
That allows Pioneer to at least have some control of liquidity to a degree and offers the asset manager some predictability in terms of outflows that may occur, an important issue for a manager of less-liquid ILS assets where capital may be required for paying claims.
The ILS Interval Fund will be marketed to investors through registered investment advisors and intermediaries, which is the same marketing route Stone Ridge has embraced. Pioneer limits RIA’s and intermediaries to at least a $5m investment, although that could be funds from many end-investors. For any investors interested in accessing the strategy directly the minimum will be $1m.
The RIA’s and intermediaries can impose their own minimum investment amounts on their customers, which could open the fund to a range of investors heading more towards the retail end of the market.
Pioneer expects to close the ILS Interval Fund to investors after its initial offering, but says that it hopes to reopen it to new subscriptions on a quarterly basis. That will likely depend largely on the market and Pioneer’s ability to deploy capital as fast as it can raise it from investors.
The ILS Interval Fund is set to invest at least 80% of its assets in insurance and reinsurance linked assets at any one time. It’s likely that Pioneer will keep at least 10% invested in highly liquid treasury money market funds as a way to always have some cash available should it require it for paying claims.
The fund will run on a 1.75% management fee with other expenses of 0.35%, meaning that Pioneer expects the expenses associated with the fund’s operation will amount to 2.1%.
Boston-based Pioneer directly manages around $72 billion of assets. The ILS Interval Fund will have its assets allocated and managed by portfolio managers Charles Melchreit and Chin Liu.
The interval fund strategy could become an increasing focus of asset managers looking to launch an ILS strategy in the current market environment. The ability to have some control and predictability of outflows and redemptions is important in the current lower reinsurance pricing environment, as well as giving the manager the ability to access more private deals to enhance diversification.