Commingled funds

Commingled funds are a type of investment vehicle that pools assets from multiple institutional investors, such as pension funds or other trusts, into a single portfolio. This pooling allows for greater diversification and potentially lower investment management costs than if each investor managed their assets separately. Commingled funds are structured as collective investment trusts (CITs) and are managed by a bank or trust company acting in a fiduciary duty. They typically invest in a wide range of asset classes, similar to how a traditional mutual fund operates.

History and Origin

Commingled funds, often referred to as collective investment trusts (CITs), have a long history, with the first funds emerging as early as 1927. Initially, their use was highly restricted due to concerns following the stock market crash of 1929, largely limited to bank trust clients and employee benefit plans. However, their significance grew over time, particularly with the evolution of retirement plans. The regulatory landscape for these funds began to solidify with oversight primarily from the Office of the Comptroller of the Currency (OCC), a bureau within the U.S. Department of the Treasury, rather than the Securities and Exchange Commission (SEC)³⁶. A significant moment for CITs came with the passage of the Pension Protection Act of 2006, which effectively approved them as default investment options for defined contribution plans, further propelling their adoption and growth in the retirement savings landscape³⁵.

Key Takeaways

Commingled funds pool assets from multiple institutional investors, offering potential cost efficiencies and broader diversification.
They are structured as collective investment trusts (CITs) and are primarily regulated by the Office of the Comptroller of the Currency (OCC), unlike mutual funds which fall under SEC oversight.
Commingled funds are generally not available to individual retail investors but are popular in employer-sponsored retirement plans.
Their fee structures are often lower than comparable mutual funds due to reduced regulatory and marketing expenses.
While offering benefits, they may also have less transparency regarding holdings and performance compared to publicly registered funds.

Valuation and Unitization

While there isn't a single "formula" for a commingled fund itself, its value is determined by the collective market value of its underlying investments, divided into units. This process is known as unitization. Each participating investor holds units, and the value of a unit reflects a pro-rata share of the fund's net assets.

The daily or periodic Net Asset Value (NAV) per unit is calculated as:

\text{NAV per Unit} = \frac{\text{Total Market Value of Fund Assets} - \text{Fund Liabilities}}{\text{Total Number of Units Outstanding}}

Where:

Total Market Value of Fund Assets represents the current market value of all securities and other holdings within the commingled fund.
Fund Liabilities include accrued expenses and any other obligations of the fund.
Total Number of Units Outstanding is the total number of units held by all participating institutional investors.

This calculation is fundamental for performance measurement and for processing investor contributions and withdrawals.

Interpreting Commingled Funds

Interpreting commingled funds largely revolves around their suitability for specific institutional contexts, particularly within retirement plans. Because these funds are not publicly traded and lack the same public disclosure requirements as mutual funds, their evaluation often requires deeper due diligence by plan sponsors and institutional investors. Key aspects for interpretation include the fund's stated investment management objectives, the expertise of the managing bank or trust company, and the fund's expense ratio. Lower expense ratios are a significant draw, but they should be weighed against factors such as liquidity, reporting frequency, and the transparency of underlying holdings and manager compensation.

Hypothetical Example

Consider a hypothetical corporate pension funds for "TechCorp," which aims to reduce its overall investment costs while maintaining broad market exposure. TechCorp decides to allocate a portion of its assets, say $50 million, to a commingled fund specializing in large-cap U.S. equities.

Initial Investment: TechCorp invests its $50 million. The commingled fund, managed by "TrustBank Inc.," pools this with assets from other qualified plans, totaling, for instance, $5 billion.
Unit Allocation: If the initial NAV per unit is $100, TechCorp receives 500,000 units (($50,000,000 / $100)).
Fund Growth: Over a quarter, the underlying portfolio of stocks held by the commingled fund appreciates by 5%, and the fund incurs $500,000 in operational expenses.
New NAV Calculation: If the total assets grow to $5.25 billion (initial $5 billion + 5% growth) and liabilities remain at $500,000, the new net assets would be $5,249,500,000. Assuming the total number of units outstanding across all investors is 50 million, the new NAV per unit would be approximately $104.99 (($5,249,500,000 / 50,000,000)).
TechCorp's Value: TechCorp's 500,000 units would now be worth $52,495,000 (($500,000 \times $104.99)), reflecting the appreciation net of expenses within the pooled investment vehicle.

This example illustrates how commingled funds provide a cost-effective way for institutional investors to access professionally managed and diversified portfolios.

Practical Applications

Commingled funds are predominantly used in the institutional investment landscape, particularly within retirement plans like 401(k)s and defined benefit pension plans. Their main practical applications include:

Cost-Efficient Investment: Due to fewer regulatory and marketing requirements compared to mutual funds, commingled funds often have lower expense ratios, making them attractive for large institutional investors seeking to reduce overall plan costs³³, ³⁴.
Accessibility for Qualified Plans: They serve as a key investment option for employer-sponsored retirement plans, allowing them to offer diversified portfolios without the higher overhead associated with publicly traded funds. Morningstar notes that collective investment trusts are increasingly used in defined benefit and defined contribution plans³².
Professional Management: Commingled funds provide access to professional investment management expertise, allowing plan sponsors to delegate investment decisions to specialized bank or trust companies.
Customization: Unlike standardized mutual funds, some commingled funds can offer a degree of customization in their investment strategies to better align with the specific needs and risk profiles of participating plans³⁰, ³¹. Russell Investments highlights that "CITs provide plan sponsors with enhanced flexibility"²⁹.

Limitations and Criticisms

Despite their advantages, commingled funds have certain limitations and face criticisms:

Limited Transparency: Commingled funds are not registered with the SEC and are not subject to the same public disclosure requirements as mutual funds. This can result in less public data on their holdings, performance, and fees, making it more challenging for investors to conduct comprehensive due diligence²⁶, ²⁷, ²⁸.
Restricted Access: They are exclusively available to institutional investors, primarily qualified retirement plans and certain other trusts or government entities. Individual retail investors cannot directly invest in commingled funds, unlike mutual funds ²⁴, ²⁵.
Regulatory Differences: While regulated by the OCC and the Department of Labor (DOL) under ERISA, the regulatory framework for commingled funds differs significantly from that for mutual funds. Some critics argue that this different oversight may lead to less investor protection, particularly regarding public accountability and transparency²¹, ²², ²³. The concern stems from potentially "hidden risks and costs" without SEC scrutiny, as noted in discussions around proposed legislation²⁰.
Liquidity and Trading: Commingled funds may have less frequent valuation and trading windows compared to daily-traded mutual funds, which can impact liquidity for plan sponsors seeking to make changes or rebalance portfolios¹⁸, ¹⁹.
Limited Public Information: The lack of public disclosure means less readily available information for comparison and analysis by independent research firms or the public, potentially hindering robust regulatory oversight and market scrutiny¹⁶, ¹⁷.

Commingled Funds vs. Mutual Funds

Commingled funds and mutual funds are both types of pooled investment vehicles, but they differ significantly in their structure, regulation, and accessibility. Understanding these distinctions is crucial for plan sponsors and financial professionals.

Feature	Commingled Funds (Collective Investment Trusts)	Mutual Funds
Availability	Primarily for institutional investors, e.g., qualified retirement plans¹⁵.	Generally available to the general public, including individual investors.
Regulation	Primarily regulated by the OCC, DOL, and IRS. Exempt from SEC registration under the Investment Company Act of 1940¹⁴.	Regulated by the SEC under the Investment Company Act of 1940.
Disclosure	Less public disclosure; no prospectus required¹³.	Extensive public disclosure, including prospectus and regular reports.
Costs	Typically lower expense ratios due to reduced regulatory and marketing costs¹².	Generally higher expense ratios due to compliance and public distribution costs.
Transparency	Lower transparency regarding specific holdings and daily pricing¹¹.	Higher transparency, with daily NAV and publicly available holdings.
Trading Frequency	May have less frequent valuation and trading (e.g., weekly or monthly)¹⁰.	Valued and traded daily.
Managed by	Bank or trust company acting as trustee.	Investment management firm.

The primary point of confusion arises because both vehicles pool assets for collective investment and often pursue similar investment strategies. However, the regulatory environment is a key differentiator. Commingled funds are designed for a specific segment of the market—institutional, often tax-exempt, investors—allowing them to operate with a different cost structure and level of public disclosure than mutual funds. This allows commingled funds to be a more cost-effective choice for large accredited investors.

#⁹# FAQs

What is the primary purpose of a commingled fund?

The primary purpose of a commingled fund is to pool assets from various institutional clients, such as retirement plans, into a single, professionally managed investment portfolio. This allows for economies of scale, potentially leading to lower costs and greater diversification than if each client invested separately.

Are commingled funds available to individual investors?

No, commingled funds are generally not available to individual retail investors. They are specifically designed for and restricted to institutional investors, most commonly qualified employer-sponsored retirement plans, government plans, and certain other trusts.

#⁷, ⁸## How are commingled funds regulated?
Commingled funds, typically structured as Collective Investment Trusts (CITs), are primarily regulated by the Office of the Comptroller of the Currency (OCC) and the Department of Labor (DOL) under the Employee Retirement Income Security Act (ERISA), especially when housing retirement plan assets. Unlike mutual funds, they are exempt from registration with the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940.

#⁶## Why do commingled funds often have lower fees than mutual funds?
Commingled funds generally have lower fees than comparable mutual funds due to their different regulatory structure. Because they are not publicly offered and are exempt from SEC registration, they incur fewer marketing, distribution, and compliance costs. Th³, ⁴, ⁵ese cost savings can be passed on to the institutional investors participating in the fund.

What are the main drawbacks of investing in commingled funds?

The main drawbacks of commingled funds include less public transparency and disclosure compared to mutual funds, as they do not issue prospectuses or publicly report daily pricing in the same manner. This can make it more challenging to assess their holdings, performance measurement, and fees. Additionally, their access is restricted solely to institutional investors.¹, ²