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Updated May 25, 2020 Reviewed by Reviewed by Marguerita ChengMarguerita is a Certified Financial Planner (CFP), Chartered Retirement Planning Counselor (CRPC), Retirement Income Certified Professional (RICP), and a Chartered Socially Responsible Investing Counselor (CSRIC). She has been working in the financial planning industry for over 20 years and spends her days helping her clients gain clarity, confidence, and control over their financial lives.
A collective investment fund (CIF), also known as a collective investment trust (CIT), is a group of pooled accounts held by a bank or trust company. The financial institution groups assets from individuals and organizations to develop a single larger, diversified portfolio. There are two types of collective investment funds:
CIFs are generally available to the individual only via employer-sponsored retirement plans, pension plans, and insurance companies. Other names for them include common trust funds, common funds, collective trusts, and commingled trusts.
CIFs are funds not regulated by the Securities Exchange Commission (SEC) or the Investment Act of 1940 but operate instead under the regulatory authority of the Office of the Comptroller of the Currency (OCC). Although CIFs are pooled funds just as mutual funds are, CIFs are unregistered investment vehicles, more akin to hedge funds.
The primary objective of a collective investment fund is, through the use of economies of scale, to lower costs with a combination of profit-sharing funds and pensions. The pooled funds are grouped into a master trust account—legally speaking, CIFs are set up as trusts—that is controlled by the bank or trust company, which acts as a trustee or executor. However, many financial institutions use investment companies or mutual fund companies as sub-advisors to manage the portfolios.
For example, Invesco Trust Company runs the Invesco Global Opportunities Trust and the Invesco Balanced-Risk Commodity Trust. Fidelity, Franklin Templeton, and T. Rowe Price also run CIFs.
The bank, acting as a fiduciary, has a legal title to the assets in the fund. However, those participating in the fund own any benefits of the fund’s assets. They are, in effect, the beneficial owners of the assets. Participants don’t own any specific asset held in the CIF but have an interest in the fund’s aggregated assets. A CIT can invest in just about any kind of asset including stocks, bonds commodities, derivatives, and even mutual funds.
CIFs are specifically designed by a bank to enhance its effective investment management by gathering the assets from various accounts into one fund that is directed with a chosen investment strategy and objective. By combining different fiduciary assets in a single account, the bank is typically able to decrease its operational and administrative expenses substantially. The designated investment strategy structure is designed to maximize investment performance.
According to a Cerulli Associates, a Singapore-based research firm, study, as of 2016, approximately $2.8 trillion was invested in CIFs, and that figure was estimated to hit $3 trillion at the end of 2018.
The first collective investment fund was created in 1927. A victim of bad timing, when the stock market crashed two years later, the perceived contribution of these pooled funds to the ensuing financial hardships led to severe limitations on them. Banks were restricted to only offering CIFs to trust clients and through employee benefit plans.
The situation began to change in the 21st century. CIFs started to be listed on electronic mutual fund trading platforms, which increased their visibility and frequency of trades. The Pension Protection Act of 2006 was a boost for CIFs, as it effectively made them the default option for defined contribution plans. Finally, target-date funds (TDFs) became popular, and the CIF structure is particularly well-suited to this sort of long-term vehicle.
Although both offer a variety of investment options and consist of a basket of assets. CIFs differ from mutual funds in several meaningful ways.
Today, CIFs frequently appear in 401(k) plans as a stable value option. According to a report on "TheStreet.com," an Investment Company Institute report found that their share of 401(k) plan assets increased from 6% in 2000 to an estimated 19% in 2016. Information from institutional investment consulting firm Callan contained in the 2018 Defined Contribution Trends Survey found that the presence of CIFs increased from 43.8% in 2011 to 65% in 2017.