A collective investment trust, or CIT, works like a combined investment pool. It puts together the investment funds of multiple accounts into a financial institution which then reinvests them. Many compare CITs with mutual funds. However, where mutual funds are traditionally restricted to public stock markets, CITs can pursue investments in other arenas outside of those markets as well as in them. Typically, CITs work in two major areas: grouped accounts for regular investment, and grouped accounts pursuing investments that are tax-exempt or tax-deferred (i.e. retirement saving plans). Individual investors do not have direct access to CITs. In every case, the investor has to work through a financial institution, such as a bank or brokerage, to benefit from a CIT.
While, technically, a CIT works similarly to a public market mutual fund noted above, it does not have the same regulatory control. Where normal stock market tools fall under the purview of the Securities and Exchange Commission, CITs instead operate as unregistered investments. This makes them far more similar to hedge funds. However, they don't necessarily have identical risks, especially not the contrarian positions hedge funds frequently take.
Another difference is that different investors’ funds are comingled in a CIT. Normally, in a public investment tool, there has to be a clear distinction in the funds down to the individual account level. Instead, a CIT operates with a singular master trust account. The financial institution that offers the CIT legally has title to its ownership. When an investor signs up, they are rewarded with the benefits of the pool’s earnings, becoming beneficial owners of the profits generated. This is known as an aggregated asset interest.
The financial institution managing the CIT benefits from the tool because it is able to leverage the large size of a collective investment toward the investment directions it wants to pursue. Essentially, utilizing the size of the investors’ aggregated strength, the institution can then realize significant profit margins that it can also profit from, even after sharing distributed gains. A singular account avoids typical administrative costs, thereby increasing profit margins even more versus traditional public fund tools. No surprise, CITs are very popular; some $3 trillion was invested in them in 2018.
The advantages for the investor can be multiple, but it depends on how the given CIT is set up. If it is part of an employer’s retirement plan, the investment and gains can be tax-deferred. They tend to have far lower administrative costs, which means greater profits for the investor as well versus that mutual funds. Investors also get to see exposure in asset fields they normally would not be able to access with a regular mutual fund.
The most common CITs are typically found as options for employees who don’t want to fuss with or employers who don’t want to provide specific stock market retirement tools. These are typically realized as options for target-date funds, instruments that look like mutual funds and follow a strategy of shifting investment approaches from liberal to conservative as a given retirement target year approaches.
In short, CITs can be an exponentially powerful option for investors who want to break away from traditional markets but also want to have the protection and stability of a large fund-guided approach as well. By combining the principles of a managed fund with non-traditional asset access, a collective investment trust gives investors another effective way to diversify their portfolios without having to go into the broader market alone, bearing the brunt of risks.