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November 30, 2020

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.

Embracing the fundamentals during uncertainty

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.

Ryan Burns portrait

Ryan Burns

Head of Global Fund Services Americas
Ryan is a Senior Vice President at The Northern Trust Company, Chicago and Head of the Global Fund Services (GFS) Relationship Management Team in North America.
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