First Eagle launches muni interval fund with other vehicles on horizon

First Eagle

First Eagle Investments Monday launched its first interval fund, joining a small but growing group of municipal bond portfolio managers seeking higher returns and fewer liquidity restraints with a vehicle that limits redemptions.

The Tactical Municipal Opportunities Fund comes as First Eagle prepares to unveil more investment products, including a new mutual fund and separately managed account strategy that will focus on higher-quality municipal bonds.

"In municipals, the opportunity set is good; the supply conditions are very robust and there's a diversity of supply and different deals that we're asked to work on in the context of private or semi-private small group placements," said John Miller, First Eagle's chief investment officer and head of the municipal credit team.

Miller joined the firm in early 2024 to launch its muni team after nearly three decades at Nuveen. In its first year, the high-yield muni fund ballooned from scratch to more than $5 billion.

"From a First Eagle perspective, we have assembled such a good team that we're well prepared to handle the entry into this market with some additional products," he said. "From a financial advisor perspective, these are the types of products that financial advisors are asking to see from us."

In addition to the interval fund, First Eagle is set to launch the Core Plus Municipal Bond Fund and a Core Plus separately managed account product, likely in early July, Miller said. Both of the Core products will invest 70% in investment grade bonds and 30% in below-investment grade debt.

"So we can be agnostic to the product wrapper but it's a 70-30 portfolio either way," Miller said.

The interval fund will invest at least 75% of its assets in triple-B, lower-rated or unrated paper. Up to 25% will be invested in special situations securities, including from issuers that seek custom financing, are in default of their obligations, are in bankruptcy, or "that are otherwise determined by the fund's investment adviser to be facing first screening issuers for creditworthiness," according to the press release.

The fund offers investors quarterly redemptions.

There are around 10 or less interval funds in the municipal market. Several of those have been launched in the past year. Interval funds, which are closed-end, not traded on any exchanges nor subject to daily redemptions, allow managers to invest in less-liquid names while being somewhat shielded from disruptive outflow cycles by the limited redemption periods.

Last year saw three new interval funds in the muni market: MacKay Shield's NYLI MacKay Muni Income Opportunities Fund, Lord Abbett's Lord Abbett Municipal Opportunities Fund and Rockefeller's Rockefeller Municipal Opportunities Fund, according to Morningstar Direct.

In late March, BlackRock Advisors LLC launched a 5.75% tax-exempt municipal interval fund for retail wealth clients known as BlackRock Municipal Credit Alpha Portfolio.

As of the end of April, there were 279 interval and tender offer funds across all markets, with a combined $181 billion in net assets, according to XA Investments. In the first four months of the year, 23 new funds were launched.

Interval funds, typically more expensive than other investment products, can carry easy-to-miss fees and encourage managers to invest with borrowed money to boost the fee revenue on income, Morningstar warned in a May article titled "The underappreciated costs and risks of interval funds."

"Such unappreciated fees can encourage interval fund managers to take additional risks that disproportionately benefit them rather than investors," Morningstar said.