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Why it Might be Time to Chill on Collective Investment Trusts

CITs, mutual funds, 401ks40 Act funds still hold up well.

Gene Huxhold is trying to the slow the roll a bit on the current enthusiasm for the industry’s collective investment trust migration. It’s not that the senior managing director of DCIO at John Hancock Investments has a problem with what’s happening necessarily, it’s more about why it’s happening.

“Collective investment trusts are more cumbersome structurally than a 40 Act mutual fund,” Huxhold said from the floor of the 2017 401k Summit in Las Vegas on Monday morning. “You have to set up a separate trust arm and have the sponsor sign a separate document.

“Many firms will say CITs are less expensive, and therefore they like them better,” he added. “But if I could give you that same cost in an individual mutual fund, you’ll probably take it.”

Their target date funds, in particular, are now so cheap that if they “offer the same strategy in a collective it wouldn’t save much more, maybe a few basis points but nothing material.”

John Hancock has the scale and buying power (of course) to ask the target date sub-advisors with whom they work to set up separate account with only their money in order avoid many of the problems associated with the actions of other investors.

“For instance, when a manager leaves and everyone pulls their money from that particular fund,” Huxhold explained, using Bill Gross’ exit from PIMCO by way of example. “We felt the bench was deep enough [with PIMCO] that we didn’t need to pull money and we stayed invested, and weren’t affected by other investor moves because of the separate account.”

Perhaps more importantly, the separate account structure to their 40 Act funds allows them to see every trade that goes in and out on a daily basis.

“We’re able to have frank discussions with the manager that they would not be able to have with us alone if it was in a general fund,” he concluded. “We don’t have to wait until the quarterly reports, or annual or semiannual reports to know that a manager might be drifting. We can execute better than CITs and we get the regulatory protections from the 40 act funds, which are all open architecture.

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