CIT’s Costs Attract Institutional Investors

New data from Cerulli Associates shows assets in collective investment trusts (CITs) grew to $2.8 trillion as of year-end 2016, representing strong year-over-year growth of approximately 11.6%.

Christopher Mason, senior analyst at Cerulli, highlights findings to the effect that many asset managers are revisiting their product offerings and considering how CITs could play a role in their business. This will likely result in ongoing CIT product expansion, putting pressure on retirement plan sponsors and advisers to weigh whether utilizing CITs makes sense as a cost-saving strategy. In fact, recent fiduciary breach lawsuits filed in district courts across the U.S. have cited plan sponsors’ lack of consideration for cost-saving investment strategies, whether CITs or institutionally priced mutual funds, as imprudent under the Employee Retirement Income Security Act (ERISA).

“Many firms are exploring the possibility of launching CITs to help meet this demand and remain competitive in the marketplace,” Mason notes. “Institutional investors are gradually looking to commingled vehicles, such as CITs, because of their heightened sensitivity about fees paid to investment managers.”

Broadly speaking, because CITs can often be priced lower than mutual funds, they serve as an attractive option for cost-sensitive defined contribution (DC) and defined benefit (DB) plans. Indeed, Cerulli’s report states the primary reason an institutional investor seeks out a CIT is the fact that it can often gain more favorable pricing compared to using other vehicles, in particular retail mutual funds.

“Nearly 95% of plan sponsors value the cost savings compared to mutual funds as one of the most important attributes of CITs,” Masons observes. “Similarly, roughly 90% of consultants feel that the cost savings compared to mutual funds is a very important attribute of CITs.”

Target-date strategies make up approximately 19.4% of total CIT assets held in DC plans, the research shows. Related to this, the majority of asset managers anticipate adding portfolio specialists/client portfolio managers to their institutional sales teams during the next 12 months; approximately 59% of managers indicate that they are very dependent on consultants for corporate DB and state/local DB mandates.

These findings are from the “North American Institutional Markets 2017: Strategies for Implementing Customized Services Across Client Segments” report. Information about obtaining Cerulli Associates research is available here.