Subscribe to Asset Servicing & Fintech Insights
Sourcing Stability With Tried-and-True Investment Products
While mutual funds and collective investment trusts are long-time investment strategy staples, their high liquidity and dependability are more needed than ever in such an uncertain environment.
As COVID-19 outbreaks spread across the globe, nothing feels certain except for continued uncertainty. The financial markets are surely not left out of this equation.
The March 2020 market volatility was some of the harshest we’ve seen in years. And although markets climbed back out of their troughs, more volatility could be ahead as governments argue over economic stimulus plans, enact new regional lockdowns, and try to stave off the spread of the virus in general.
In a previous article, I discussed how investment managers should seek out the familiar to expand capabilities for current investors as they make their way back from Q1 COVID-19 volatility and weather new periods of market stress. The same advice can apply when it comes to the kind of products managers offer in seeking to forge through volatility.
Daily liquidity, transparency and dependability are key characteristics for many at the moment. While ETFs fit the description and have been making headlines as of late, fund managers shouldn’t forget about mutual funds and collective investment trusts (CITs) which offer similar benefits.
ETFs are arguably the low-risk daily liquidity tool that are experiencing the greatest growth currently, but mutual funds and CITs aren’t going anywhere in terms of investor demand and as fundamental vehicles in managers’ investment strategies. According to Cerulli Associates, the duo takes up the top two spots as the most common investment vehicles offered by managers, with 89% offering mutual funds and 79% offering CITs. Additionally, 45% of managers see CITs as a large opportunity for their firms moving forward.1
Putting a renewed focus on these investment vehicle staples could help managers meet their investors where they are as certainty about the future hangs in the balance. A significant portion of asset owners seem to be in the market for lower-risk strategies, as a report from bfinance states that 24% of institutional investors are changing their strategic asset allocation while 35% are making risk management changes.2
So what is it about mutual funds and CITs that keep them so dependably embedded in so many investment strategies? Particularly in our current age, their appeal revolves around three key factors:
- Reliability as an investment strategy staple – In terms of investment strategy, mutual funds and CITs are tried-and-true tools and offer complementary benefits – while mutual funds offer the assurance of strong regulation, CITs offer an attractive cost structure benefit. Both are daily liquidity vehicles with strong oversight, providing greater levels of comfort to investors and providing more transparency into the daily value of the investments. They offer key traits during a period of volatility in that they’re a well-trod path for investment strategy and they’re easier investments to exit if investors need to raise cash quickly – something we saw occur in droves as the pandemic spread globally in the spring of 2020
- Investor flexibility – Fund managers are capable of selling mutual funds to a broad range of investor categories for a couple of reasons. They carry a lower barrier to entry for investors with fewer assets. They’re also able to be purchased by both retail and institutional investors, like pensions and endowments they offer some of the broadest distribution reach of any U.S. fund vehicle. Likewise, CITs’ popularity in defined contribution and defined benefit plans open them up to a wide market of employers and their plan participants. These factors make mutual funds and CITs a relevant investment for investors across the wide landscape
- Saved time and increased efficiency – Certain elements of mutual fund management and CITs are affordable to outsource. Vehicles like series trusts enable a trusted partner to take care of fund structure setup, board oversight and compliance. In both mutual funds and CITs, third-party fund administrator services also take the bulk of back-office responsibilities off fund managers’ hands. Outsourcing these kinds of functions frees up the fund manager’s team to focus on activities more directly tied to defining strategy and generating alpha. In fact, many asset managers seem to have outsourcing front of mind. According to Northern Trust’s Driving Growth in Asset Management report, 34% plan to control costs in 2020 via outsourcing, and 40% are planning to outsource their back-office operations within the next two years3
Since the beginning of the pandemic, we’ve made our way through one significant period of volatility, and more are sure to come as we move through continued virus spread and eagerly await news of vaccine approval and distribution. If periods of volatility continue to emerge as we fight through the sustained outbreaks, mutual funds’ and CITs’ high liquidity and reliability make them key tools for fund managers’ distribution strategies.
1 Ignites, “It’s All About the Packaging: Product Development in 2020”, October 21 2020.
2 bfinance, “Asset Owner Survey: Managing Through Uncertain Times”, July 2020.
3 Northern Trust, “Driving Growth in Asset Management”, 2020.
Head of Global Fund Services Americas
Confidentiality Notice: This communication is confidential, may be privileged, and is meant only for the intended recipient. If you are not the intended recipient, please notify the sender as soon as possible. All materials contained in this presentation, including the description of Northern Trust, its systems, processes and pricing methodology, are proprietary information of Northern Trust. In consideration of acceptance of these materials, the recipient agrees that it will keep all such materials strictly confidential and that it will not, without the prior written consent of Northern Trust, distribute such materials or any part thereof to any person outside the recipient’s organization or to any individual within the recipient’s organization who is not directly involved in reviewing this presentation, unless required to do so by applicable law. If the recipient is a consultant acting on behalf of a third party client, the recipient may share such materials with its client if it includes a copy of these restrictions with such materials. In such event, the client agrees to comply with these restrictions in consideration of its accepting such materials.
© 2021 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability as an Illinois corporation under number 0014019. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch, Northern Trust Global Investments Limited, Northern Trust Securities LLP and Northern Trust Investor Services Limited, 50 Bank Street, London E14 5NT. Northern Trust Global Services SE, 10 rue du Château d’Eau, L-3364 Leudelange, Grand-Duché de Luxembourg, incorporated with limited liability in Luxembourg at the RCS under number B232281; Northern Trust Global Services SE UK Branch, 50 Bank Street, London E14 5NT; Northern Trust Global Services SE Sweden Bankfilial, Ingmar Bergmans gata 4, 1st Floor, 114 34 Stockholm, Sweden; Northern Trust Global Services SE Netherlands Branch, Viñoly 7th floor, Claude Debussylaan 18 A, 1082 MD Amsterdam; Northern Trust Global Services SE Abu Dhabi Branch, registration Number 000000519 licenced by ADGM under FSRA # 160018; Northern Trust Global Services SE Norway Branch, 3rd Floor, Haakon VII's Gate 6, 0161 Oslo, Norway; Northern Trust Global Services SE Leudelange, Zweigniederlassung Basel, Aeschenplatz 6, 4052, Basel, Switzerland. The Northern Trust Company Saudi Arabia, PO Box 7508, Level 20, Kingdom Tower, Al Urubah Road, Olaya District, Riyadh, Kingdom of Saudi Arabia 11214-9597, a Saudi Joint Stock Company – Capital 52 million SAR. Regulated and Authorised by the Capital Market Authority License # 12163-26 CR 1010366439. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) Registered Office: Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3DA. Northern Trust International Fund Administration Services (Ireland) Limited (160579) / Northern Trust Fiduciary Services (Ireland) Limited (161386), Registered Office: Georges Court, 54-62 Townsend Street, Dublin 2, D02 R156, Ireland.