For non-US fund managers wishing to tap into the US retirement marketplace, setting up a Collective Investment Trust (CIT) could be an attractive proposition, given the growth of defined contribution (DC) assets. Thanks to their ease of set-up, speed to market, and share class flexibility, CITs are enjoying a renaissance period.
As outlined in a recent white paper by SEI – The Defined Contribution Market Meets Its Match - DC assets have grown from USD4.3 billion just over a decade ago (2006) to USD7 trillion through the end of 2016. They account for 28 per cent of the USD25 trillion in US retirement assets.
Collective Investment Trusts are pooled vehicles that are designed specifically for the US retirement market.
The reason for their popularity is two-fold: firstly, they are operationally as easy to utilise as US mutual funds. Secondly, they are generally more cost-efficient than their US mutual fund equivalent. Consequently, it is becoming increasingly common for quality investment managers to have both mutual funds and CITs in their fund range to satisfy different investor types.
“While the overall US retirement plan market has continued to grow over the past 30 years, the defined contribution segment has grown at a faster pace,” comments Robert Muse, Senior Vice President, SEI Trust Company. “There has been increased focus on plan sponsors in recent years with respect to the sound fiduciary principles that need to drive decision-making. When they exercise their fiduciary expertise, plan sponsors have many responsibilities with respect to the creation and maintenance of their retirement plan – including the selection of investment vehicles appropriate for their specific participant base.”
Muse says that one of the key factors fiduciaries need to consider in making sure they are choosing the best investment vehicles for a particular plan, is fees:
“Fees are an incredibly important feature that US plan sponsors need to factor into their decision-making process when determining the most appropriate investment structure. In that respect, CITs really do shine in contrast to many other investment vehicles.”
Discussing the growth of DC assets under management, Muse observes a recurring theme in recent times, with respect to the managers that SEI works with. They are not only US-based but often times are European or Canadian-based managers that have a US registration. “But often the bulk of their investment management staff is overseas. A CIT is typically not used to make their first foray into the US institutional market, but it is certainly a nice complement to increase their efforts,” says Muse.
Within the regulatory structure for creating a CIT, one needs to have a trustee in place to maintain the vehicle on an ongoing basis. That often means partnering with the right trust company (either a bank or a financial services firm like SEI) that has the legal ability, the expertise and the authority to maintain and keep the CIT marching in the right direction.
Although CITs are coming back into vogue, these are not new vehicles. Indeed, CITs have been around since the 1920s. They fell out of favour some time ago, but over the last 10 to 15 years, as US plan sponsors have thought about the impact of fees on their product selection decisions, CITs have enjoyed increased popularity, year-on-year.
Unlike ’40 Act mutual funds, CITs, which are designed purely for the US retirement market, are exempt from SEC regulation and are not subject to the Securities Act of 1933 or the Investment Company Act of 1940.
“It is a lot more straightforward to set up a CIT than it is to establish a US ’40 Act mutual fund,” says John Alshefski (pictured), Senior Vice President and Managing Director of SEI’s Investment Manager Services division. “The fund sponsor still has to be a US registered investment adviser but they do not have to go through the SEC registration process for the fund itself. They can utilise SEI, for example, as we offer a turnkey trustee solution provider to get the CIT to market. It is not an SEC registered vehicle.
Whereas US mutual funds adhere to a single set of federal guidelines that all US mutual funds adhere to, CITs can be either federally regulated or they can be state regulated.
Aside from being less onerous from a regulatory perspective, operationally CITs are very easy to utilise. They look, act and feel a lot like US mutual funds, often offering the same benefits of daily liquidity, daily NAV etc.
“I think another benefit is that the CIT is built for a specific class of investor,” adds Alshefski. “With a US mutual fund you can reach out to a broader class of retail investors, switch distribution markets, but a CIT can be built for one or more targeted markets. Due to market demand and overall asset allocations, not surprisingly, many of our CITs utilising our turnkey solution are large cap equity-focused. However, CIT investment strategies truly cover the spectrum across the investment universe. Thus, for example, we also have a number of CITs that are focused exclusively on commodities and real assets. It really depends on the target audience and market demand.”
In other words, anyone wishing to successfully launch a CIT should know precisely who the target market is and what the investment needs of that market are presently. However, this could also be viewed as a risk in the sense that one can only reach a single investor type, potentially placing more pressure on the investment manager to raise enough AUM for the CIT to be deemed a success.
SEI’s white paper, in referencing research by BrightScope, a subsidiary of Strategic Insight – a leading provider of business intelligence and research to the global asset management community – finds that CITs have become increasingly attractive to plan sponsors when plan AUM exceeds USD100 million. Currently, 7 per cent of plan sponsors with more than USD100 to USD200 million in DC assets use CITs. This figure jumps substantially to 37 per cent for plan sponsors with more than USD1 billion in DC assets, based on BrightScope’s analysis of 2014 Plan Year Form 5500 data.
Muse is in no doubt that there is plenty of room for growth among mid-size plan sponsors.
“Five years ago, the huge retirement plans paved the way for CITs to grow. However since the fiduciary standards apply to all plan sponsors regardless of size, coupled with the fact that CITs are just as easy to use as mutual funds, they are working their way down market,” says Muse.
CITs are being embraced by more and more retirement plans as well as professionals within the industry: specifically consultants and financial advisors are helping plan sponsors to obtain the right types of vehicles they need to uphold their fiduciary responsibilities.
“Investment consultants are already quite fond of them as an option and now, when you go into the financial advisor space, where a lot of the smaller plan sponsors seek advice, those professionals are also seeing the advantages of CITs,” suggests Alshefski.
Even though CITs are pooled vehicles, it is possible to introduce a degree of customisation. If, for example, an investment manager identifies a specific investment strategy that may have very limited market appeal to mega-sized plan sponsors, they can create a CIT that fills that specific need. For a variety of reasons, some CITs actually have only a single investor.
As CITs enjoy a resurgence, it is vital that investment managers think carefully about the trust company with whom they choose to work when managing CIT assets.
This is a specific type of vehicle and the way one administrates it is specialised.
“If you’re not partnering with a quality provider who has been doing this for a long time and has an established name in the industry, you’re going to be doing yourself and the plan participants an injustice. You need the operational, administrative and fiduciary set-up perfected in order to run a CIT successfully,” concludes Alshefski.
To read the SEI white paper in full, please click on the following link: http://seic.com/enUK/im/18598.htm