State Street Collective Investment Trust
Peter Brown talks to Jenna Lomax about the historic misunderstanding and stigmas surrounding Collective Investment Trusts, and why the current market provides the perfect backdrop to bring them to the fore
CITs are tax-exempt pooled investments. Can you explain a little more about them and their history?
Collective Investment Trust (CITs) date back to 1927 and can be treated as a peer of mutual funds, as far as their history, longevity and durability as an infrastructure is concerned. However, throughout their history, they have been hindered by some misunderstanding, stigmas and restrictions that have really not allowed them to grow as much as the traditional mutual fund has.
As a structure, CITs are very similar to mutual funds. The contemporary CIT is a lot closer to the definition of a mutual fund than a CIT of generations ago. They can offer daily valuation, ticker symbols and are undergoing a lot of the same financial rigorous audit and disclosure that a mutual fund does under the 1940 Investment Company Act. The contemporary CIT consists of what a contemporary shareholder is looking for and is now the right offering for a lot of retirement plan assets.
The mutual fund has become the default option for a lot of retirement plans and accounts. This has grown the mutual fund industry to somewhere in the neighbourhood of US$25 trillion. CITs are currently about a fifth of that size, and it is because of these restrictions that they have not been offered up for certain types of accounts and plans. For that reason, they have not grown as quickly. A lot of their restrictions, stigmas and misunderstandings are thankfully changing — CITs are levelling up to par with mutual funds in terms of transparency. They are currently adopting certain features and functions that the mutual fund boasts.
What benefits do self-trustee operators gain by using their own CITs? And what can be gained by third-party trustees providing CIT-related services to other groups?
The decision on whether an asset manager would want a self-trustee or a third-party trustee often comes down to scale and size. However, this understanding is changing. Historically, asset managers that are essentially “self-trusteed” are now contemplating whether being a trustee is a differentiator and whether they can gain benefits by going with a third-party trustee.
We have seen a number of our clients decide that it is cost-efficient to use a third-party trustee, with a shift in the asset management’s focus on what their strengths are — which is growing assets and beating benchmarks.
We support the operations of asset managers and the trustees, and we partner with some of the largest independent trustees that specialise in the fiduciary governance that CITs require. We are one of the largest operations services for what CITs require, whether it be custody, accounting, fund administration, transfer agency or financial reporting for CITs in the US market.
We also support a wide range of asset classes that the CITs wrappers use, including equities, fixed income and alternatives, including money market funds and even collateralised loan obligations.
What are the biggest challenges that trustees face concerning CITs today? How can State Street help a trustee of a CIT with the management of a trust, and the reporting requirements that responsibility entails?
As the largest servicer of CIT assets, we are consistently refining our operational workflow to meet the needs of this ever-evolving industry, and we have that connectivity throughout each step of the process — from the investment decision through to the safekeeping — providing operational efficiencies throughout the end-to-end ecosystem.
Asset managers in particular can rely on us to not only service their CITs, but also their other products, such as exchange-traded funds. That same operational framework that we provide for their CITs is going to be consistent with any other products that asset managers have, and that seamless integration of data and operations solves a significant problem for our clients. It provides a higher level of reporting — a level of automation and standardisation that is now expected in the market.
Given the current regulatory climate, are trustees facing more regulatory hurdles than they were perhaps two to five years ago? Given the backdrop of the last two years, what has changed?
Regulation is an interesting element for CITs. Mutual funds, money market funds and hedge funds are under more scrutiny than ever before. The regulatory components of most interest for CITs is regulation and the regulatory tailwind that is coming up later this year.
The Setting Every Community Up for Retirement Enhancement (SECURE Act 2.0) is a pending regulation in the US designed to significantly increase the size of the current CIT market, permitting CITs to be offered to 403(b) plans — a significant retirement vehicle that has historically not been allowed to offer CITs in the US. This change in regulation presents an opportunity of around $1 trillion for assets.
Asset managers that offer CITs can now go after these assets that historically could not offer a CIT. That expanded access to CITs will benefit the CIT as a product and will also benefit the end shareholder who can now get access to a product that other retirement plan assets have already been able to leverage for generations.
The aforementioned regulatory tailwind is really a once-in-a-generation opportunity for CITs to capture an additional trillion dollars in new assets. For any of the asset management clients considering a CIT, now is the best time to start considering launching a CIT.
The asset manager is responsible for the investment strategy and the efficient execution of the investment decision. How do State Street’s fund administration and transfer agency teams meet these challenges?
We maintain strong relationships across participant record keepers, broker-dealer counterparties, transfer agents and consultants, providing our clients every opportunity to leverage our State Street relationships. We are a strategic partner and we want to drive the success for our CIT clients to the extent that if a client wishes to incorporate other third-party solutions or data, they can make it possible with our offering. In addition, if a trustee wishes to provide transfer agent data, they can aggregate the data into State Street’s Alpha Data Service solutions to allow a comprehensive view across the asset manager and the trustee. We support our trustee and client with custody and accounting, full fund administration and transfer agency services.
A CIT is seen as a less expensive structure than other investment vehicles, due to fewer administrative, legal, and regulatory requirements. But what other challenges can CITs sometimes face?
It is often cited that CITs have less regulatory burden, but they are still assets and are held to a very high standard. With this in mind, it is important to work with a team that is used to servicing them and a team that is used to understanding some of the unique assets of the operations and trading of a CIT.
State Street has decades of experience working with asset managers who have CITs under their trust’s arm, as well as third-party trustees who work with the various asset managers. Regardless of the relationship, our service model is built around servicing the client and making the best experience for them.
ESG is becoming a widening consideration across many facets of asset management and servicing. What kind of compliance challenges and opportunities are CITs facing, when it comes to ESG considerations?
ESG reporting for CITs leverages the same framework of products that other structures utilise. Our ESG and compliance analytics service is something that CITs can leverage. There is a significant benefit to clients in that they have a consistent set of tools that are deployed across all their products, all their managers and all their trusts.
Interestingly, CITs have usually lagged ESG usage, due to some hesitancy of defined contribution (DC) plans to offer ESG products, but the nature of this is shifting. A recent study showed that about two thirds of retirement specialists believe ESG products will gain broader adoption in the DC market.
Firms are also assessing how the measurement of CITs in the DC space can help with the materiality that is needed. Through the understanding that these assets need to be around for a long time, asset managers are now using ESG frameworks to understand climate-related risks — understanding that climate action is part of the fiduciary responsibility, the decision making, and portfolio construction.
What would you say to a company considering State Street’s CIT options? How do State Street’s CIT offerings differ from others provided by similar scaled financial institutions?
State Street has built a client-centric experience to support the asset managers and the trustee, and we have a relationship with the largest third-party trustees, as well as with the clients that want to leverage a third-party trustee. For clients that are thinking about launching a CIT there are many factors to weigh — the legal, the financial and regulatory implications, whether to perform the trustee functions in-house or outsource it, and which model best aligns with CIT objectives and goals.
State Street can guide a client through each milestone in the CIT journey. Asset managers can benefit from our scale, expertise and ecosystem of CIT experts and market participants who have the insight that they need, as asset managers try to evaluate the fund or structure that they are looking to launch. We equip the trustee and asset manager with tools and capabilities they need to meet their client’s investment objectives and then grow those retirement plan assets.
Through its front-to-back platform, as well as its ecosystem market specialists, regulatory experts consultants and trustee partners, State Street CIT solutions support its partners wherever they are in the CIT market.
