Collective Investment Trusts (CITs) have gained traction in recent years as an alternative investment vehicle for institutional investors. While many people are familiar with mutual funds and exchange-traded funds (ETFs), not everyone is acquainted with CITs. In this article, we will take a closer look at the structure and benefits of Collective Investment Trusts.
What are Collective Investment Trusts?
A Collective Investment Trust (CIT) is a pooled investment vehicle that combines the money of multiple investors to create a larger, more diversified fund. It is similar to a mutual fund in that it is managed by professional asset managers who make investment decisions on behalf of the trust’s participants. However, there are some key differences between CITs and other investment options.
The Structure
One distinguishing feature of CITs is that they are typically available only to qualified retirement plans, such as 401(k) plans or pension funds, rather than individual retail investors. This restricted access helps keep costs down since CIT sponsors are not burdened with the same regulatory requirements and administrative complexities associated with offering investments to the general public. Unlike mutual funds, CITs do not need to be registered with the Securities and Exchange Commission (SEC). Instead, they fall under the jurisdiction and oversight of bank regulators like the Office of the Comptroller of the Currency (OCC) or state banking authorities.
The Benefits
- Lower Costs: CITs generally have lower expenses compared to mutual funds due to their exempt status from SEC registration requirements. Additionally, since they cater primarily to institutional investors, economies of scale often come into play, resulting in lower expenses for participants.
- Flexibility: Unlike mutual funds, which must disclose their holdings regularly, CIT managers typically enjoy greater flexibility when it comes to portfolio constructions and changes without disclosing specific positions or stocks held within their portfolios. This can help enhance both portfolio management strategies and competitiveness in a rapidly changing market environment.
- Customization: CITs can be customized and tailored to meet the specific investment needs and objectives of qualified retirement plans. This customization allows the design of investment strategies that align with particular plan goals, beneficiary demographics, and risk tolerance profiles.
- Stability: CITs tend to have more stable assets under management compared to mutual funds. This stability is attributable to the long-term nature of many institutional investments and the fact that investors in CITs are less likely to react impulsively to market events or news headlines.
- Access to top-tier money managers: Due to their focus on large institutional investors, CITs often attract top-tier asset managers who may otherwise be inaccessible through other investment vehicles. This allows participants in CITs to benefit from the expertise and track records of highly skilled portfolio managers.
The Drawbacks
While there are many benefits associated with investing in CITs, there are also a few considerations for potential participants:
- Limited liquidity options: Unlike mutual funds or ETFs, which offer daily liquidity, CITs typically have restrictions when it comes to redemption frequency. Investors may need to refer to the trust agreement or consult with their plan administrator regarding redemption rules and procedures.
- Lack of public availability: As mentioned earlier, CITs are generally limited only to qualified retirement plans, making them inaccessible for individual retail investors looking for diversification options outside of employer-sponsored plans.
Considerations for Choosing a Collective Investment Trust
When considering investing in Collective Investment Trusts (CITs), there are several factors that participants should take into account:
- Investment objectives: Before committing to a CIT, it is essential to align the investment objectives of the trust with your own financial goals and risk tolerance. Some CITs may focus on specific sectors or asset classes, so be sure to choose one that complements your investment strategy.
- Performance track record: Evaluate the performance track record of the CIT and its asset manager over time. Look for consistent and reliable returns relative to the benchmarks, and consider any periods of underperformance or volatility.
- Fees and expenses: While CITs generally have lower costs compared to mutual funds, it is still crucial to understand the fees and expenses associated with participating in the trust. Ensure that you are comfortable with the fee structure and that it aligns with your financial objectives.
Conclusion
Collective Investment Trusts (CITs) offer unique advantages such as lower costs, customization options, access to premier money managers, stability, and regulatory flexibility. While primarily available only through qualified retirement plans like 401(k)s or pension funds for institutional investors, advisory firms continue exploring opportunities for offering similar structures aimed at retail clients – such as Community Capital’s revolutionary pooled fund platform Trustshare. As alternative investment vehicles continue growing in popularity across markets globally, they will further evolve with time as customers’ changing needs shape how we invest in the future.