What is a Collective Investment Fund - CIF
A collective investment fund (CIF), also known as a collective investment trust, is operated by a bank or trust company and handles a group of pooled trust accounts. Collective investment funds group assets from individuals and organizations to develop a larger, diversified portfolio. There are two types of funds: A1 funds are grouped assets contributed for the purpose of investment or reinvestment, and A2 funds are grouped assets contributed by trusts exempt from federal income tax.
BREAKING DOWN Collective Investment Fund - CIF
The primary objective of a collective fund is, through 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 that is controlled by the bank, which acts as a trustee or executor.
The bank, acting as a fiduciary, has a legal title to the assets in the fund; however, those participating in the fund own the 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 fund’s aggregated assets.
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. By combining different fiduciary assets in a single account, the bank is typically able to substantially decrease its operational and administrative expenses. The designated investment strategy structure is designed to maximize investment performance.
Examples of collective investment funds are the Invesco Global Opportunities Trust and the Invesco Balanced-Risk Commodity Trust, offered by Invesco Trust Company. As of 2016, approximately $2.5 trillion was invested invested in CIFs.
Regulation and History
There are several names used to refer to a collective investment fund, which is the official term used in a comptroller’s handbook. Other names include common trust funds, common funds, collective trusts and commingled trusts. In essence, CIFs are funds that are not regulated by the Securities Exchange Commission (SEC) or the Investment Act of 1940, as mutual funds are, but are 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, in contrast to mutual funds, CIFs are unregistered investment vehicles, more like hedge funds.
The first collective fund was created in 1927. When the stock market crashed two years later, the perceived contribution of these pooled funds to the crash led to severe restrictions on them. Banks were restricted to only offering CIFs to trust clients and through employee benefit plans. The Pension Protection Act of 2006 was a boost for CIFs, as it effectively made them the default option for defined contribution plans. CIFs frequently appear in 401(k) plans as a stable value option.
Collective Investment Trust Differences From Mutual Funds
Although both offer a variety of investment options, CIFs differ from mutual funds in several meaningful ways. Perhaps most notably, they tend to have lower operating costs than mutual funds due to their pooled nature. They are also offered only by banks and trust companies for retirement plans and not available to the general public, unlike mutual funds, which investors can purchase directly or through a financial intermediary, such as a broker. Oversight of CIFs is usually delivered by managers employed by the trustee, whereas mutual funds are led either by a mutual fund manager or group of managers as approved by a board of directors.