The

Investment Vehicle
Owners Manual
When you are buying a car, it is rare to find a perfect vehicle. However, with
a methodical approach you can usually drive away with one that meets your
specific requirements. Selecting the right investment vehicle can pose similar
challenges. There are many different types of investment vehicles available,
and it takes work to understand their parameters, their regulatory backdrops,
and their advantages and disadvantages.

Asking the Right Questions

All key decision-makers should take the time to dig into the details
when selecting an investment vehicle. Choosing wiselyand
understanding all of the implications, benefits, and potential
riskscan be crucial to the long-term success of your portfolio.

In this charticle we propose key questions that institutional investors should

consider before they jump in the drivers seat. On the reverse, we provide
a road map of some of the most popular investment vehicles among U.S.based investors.

First, know thyself. Each investor situation is unique. Is your organization a public, corporate, or Taft-Hartley pension plan; a defined contribution plan; or an endowment or foundation? Review
the broader issues, then consider the characteristics of your specific plan or organization and its legal guidelines and restrictions.
Reflect on what you have learned thus far in the manager search
process, as well as what past experience may have taught you.
Having a clear sense of your own situation before you embark on
vehicle discussions with a manager can be enormously helpful.
Then, consider the six issues below.

Investment Consultants Client Asset Allocation

(by Vehicle Type)

Limited partnerships 5%
Fund-of-funds 4%
Institutional
separate accounts
38%

Institutional-class
mutual funds 29%

Exchange-traded
funds 3%

Collective
trust funds
22%

Note: Components do not sum to 100% due to rounding.

Source: Cerulli Associates, 2012, in partnership with Institutional Investor Institute

Asset Manager Vehicles Used in Product Development

100%
80%

91%

Reflect on the purpose of the investment. Where does

it fit into your overall portfolio, and what role is it intended
to play? Are there any benchmarking issues or asset class
requirements? How quickly do you need to implement?
What is your projected holding period?

Consider the funds size and scope. Have you considered potential exposure and minimum investment requirements? What would be your percentage of ownership of the fund? How many total investors are in the fund
and how concentrated is the ownership?

Examine the liquidity and risks of the fund against

your plans needs and requirements. What is the valuation frequency? Are there any redemption or investment
restrictions?

Review governance issues and understand their implications. What agencies have regulatory oversight and at
what level of scrutiny? Who is the trustee/custodian/administrator and are there additional service providers or directors? What are the permissible investments? Is securities
lending permitted? What is the legal form of the fund? What
is the country of domicile?

60%
52%

40%

48%

20%
0%

22%
Institutional
separate
accounts

Collective
trust
funds

Institutionalclass
mutal funds

Limited
partnerships

4%
Fund-of-funds

Note: Separate accounts are typically used for large institutional clients ($100 million+).
Source: Cerulli Associates, 2012, in partnership with Institutional Investor Institute

Vehicle Checklist

Visibility

Regulator, Trustee, Custodian Valuation

Frequency, Settlement Cycle Transparency of
Underlying Holdings

Understand the ownership structure. Who has ownership of the underlying securities or units of the fund? Who
retains voting rights? Is fund look through available? Do
you have control?

Eligibility

Institutional or Retail Qualified or Non-Qualified

Hurdles

Investment Minimums Asset Size Constraints

Idiosyncrasies Active or Passive Holding Period Resale or

Control

Investment Policies and Guidelines Ownership

Liquidity

Sole Investor or Collective Ownership

Expenses

Published, Sliding Scale, or Relationship Rates

These questions should steer the conversation in a productive direction

Explicit/Implicit Costs Performance Based Fees

and help ensure a smooth transition. Your legal team and investment

under ERISA Tax-Exempt or Taxable Investor

Market Capitalization Considerations

Transfer Limitations

Interest, Voting Rights Securities Lending

Redemption Gates, Lock-ups or Restrictions

Assess the big picture of the funds fees, expenses,

tax and accounting implications. What is the fee structure? What are the ramifications of tax requirements?
What are the explicit and implicit costs embedded in the
structure? What will be reflected on your financial books
(shares or units, or securities held as assets of the fund),
and how will you handle valuation?

consultant can also provide helpful insights and guidance.

You have considered your unique needs and restrictions and reviewed several important
questions. Now, use this overview* of institutional investment vehicles to help you steer
your portfolio toward success.

Also available to retail investors

Regulated by the SEC as a 40 Act fund

Legend

Mapping the
Investment Vehicles

Overseen by federal and state banking regulators,

the Office of the Comptroller of Currency, and/or
the Department of Labor
Securities lending permitted, although each
situation will have unique restrictions
Control/transparency

Mutual Funds

Closed-End Funds

Exchange-Traded Funds (ETFs)

Each investor in the fund owns shares of the fund but does
not own a pro-rata share of the underlying securities. Share
classes may be issued per type of investor, each class with
different fee structures. Typically, operating expenses are
paid out of fund assets and fees paid by investors indirectly.
The SEC requires a minimum 85% of assets in liquid securities. Securities lending may be permitted, but total assets on
loan are limited to 33 1/3% of value of total fund assets. Daily
valuation. Pros: They are highly liquid, diversified portfolios
and are accessible/affordable for smaller investors. They
are subject to more extensive disclosure requirements than
any other vehicles. A board of directors (including at least a
majority of independent directors) oversees a mutual fund.
Both governance and legal structure are subject to requirements and restrictions of the 40 Act. Fund information is easily accessible via ticker symbol. Cons: No investor control
of investment guidelines. Institutional-class share fees are
generally higher than those of other vehicles for similar mandates although a series trust may offer lower fees. Ownership of more than five percent (5%) of the shares may raise
complex affiliation issues.

These funds sell a fixed number of shares at one time (in

an IPO) that later trade on a secondary market, although
some are structured as interval funds with a continuous
offering and periodic redemptions. They list on an exchange and trade like a stock but are registered under
the 40 Act and subject to limitations in governance and
structure. Market prices fluctuate daily, often much higher
or lower than the NAV of fund assets (vs. ETFs, which
typically closely track NAV). Liquidity is subject to secondary market, and (unless structured as an interval fund) the
fund would not have to liquidate securities to meet sale
transactions. Can have persistent price premium/discount
to NAV. Pros: To redeem shares, investors must sell on
an exchange to a buyer (except for interval funds), so the
fund manager may not need to sell any underlying stock,
reducing transaction costs for remaining investors. Cons:
Price fluctuations are typically more volatile than other
collective investment vehicles. Liquidity is dependent on
market conditions except for interval funds.

Investment companies whose shares are securitized and

traded intraday on stock exchanges at market-determined
prices. The creation basket, a daily listing of specific securities and quantities held by the fund, allows certain large broker-dealers (authorized participants or APs) to buy blocks
of new ETF shares (creation units) directly from the fund
versus delivery of the replicating basket of securities. AP
can also redeem ETF shares to receive the corresponding
underlying basket of securities. The creation/redemption process is what allows ETF market makers to provide intraday
liquidity in the ETF. There is an annual management fee and
the trade broker also charges a buy/sell commission. Pay
attention to varying liquidity and spread prices. Governance
and legal structure similar to a mutual fund. Pros: Daily holdings transparency. Real-time intraday NAV and liquidity. Certain tax efficiency advantages for taxable investors. Cons:
Embedded transaction costs due to issuer fees for creation
and redemption of units could be high, varies depending on
underlying basket of securities being replicated.

Collective Investment Trusts (CITs) and

Common Trust Funds (CTFs)

Institutional Separate Accounts

Series Trusts
Used by mutual funds to form one legal entity with one board
of directors, one set of officers, and a single registration, but
with many separate, marketable series. Offered as a turnkey
solution, with trust and operational components already in
place. Pros: Substantial time and cost savings in fund setup.
Funds are subject to more extensive disclosure requirements
than any other comparable financial product. Generally less
expensive than mutual funds but more expensive than CITs
or CTFs. Cons: Limited structure and design flexibility.

Unit Investment Trusts (UITs)

Hybrid pooled vehicles with characteristics of both mutual
funds and closed-end funds. They typically issue a specific,
fixed, redeemable number of shares, called units. The investment portfolio is not actively traded. Instead, a set of
investments is bought and held until the termination date,
when the trust dissolves and proceeds are paid to shareholders. Liquidity is subject to secondary market, but typically the fund should not have to liquidate securities to meet
sale transactions. Securities held in a UIT generally remain
static, which allows investors to know the composition of
the portfolio, fees, and scheduled maturity date. Pros: Typically have lower expenses than open-ended funds and
may generate fewer capital gains taxes than traditional mutual funds, but are subject to 40 Act. Cons: Fixed termination date; may liquidate at an inopportune time. No board,
corporate officers, or investment advisor. Fewer investment
options than mutual funds. May have limited number of securities, so more susceptible to price volatility than a lessconcentrated portfolio. Typically high distribution fees borne
by investors.

Unique Custom Vehicles

Single mingle: A collective fund with a single
owner, a solution devised by Callan in the late
1990s. Typically is a subset or sleeve of a larger
commingled fund. Gives a single investor control of proxy voting, class actions, and securities
lending parameters. Underlying portfolio management similar to the larger commingled fund.
Only available to mega institutional investors.
Mutual fund of one: Similar to the concept of
the single mingle, but created using a mutual
fund construct. Typically a different share class
or series of an institutional share class, but developed for a single institutional investor, company,
or common affiliated entities. Must comply with all
mutual fund regulatory guidelines.

Maintained by a bank or trust company acting as trustee

that pools trust assets of qualified employee benefit plans
(as defined by ERISA) such as pension, profit-sharing, retirement, or other trustslowering costs through economies of scale. A bank administering a collective fund may
retain an affiliated or unaffiliated custodian or registered investment advisor (subject to prudent delegation and oversight as required). Some plan types, including IRAs, 403(b)
plans, and VEBAs, may not invest in CITs. Fees are generally negotiable and include investment management, custody, and valuation services. Liquidity at trustee discretion
within certain parameters.
Common trust funds, a similar vehicle, are also operated
by a trust company or bank acting as a trustee to pool assets, but often only tax-exempt entities can participate [i.e.,
501(c)(3) non-profits, endowments and foundations, hospitals, health and welfare plans, and VEBAs]. CTFs often
facilitates trust services. Oversight is by the banks trust
department, and is subject to the banks primary regulators. Pros: Exempt from SEC registration, contributing to
a cost structure that is generally lower than that of mutual
funds. Plans without the scale to access separate accounts
can utilize collective vehicles, often with the same portfolio
mandates. Some asset classes are available through CITs
but not mutual funds, such as direct real estate. Cons:
Generally fewer investment choices than mutual funds. Often not traded on an exchange, which can make tracking
performance and characteristic information difficult.

Global Investment Options

The European Union (E.U.) has sought to establish a single regulatory framework for openended
funds in order to provide higher levels of investor
protection, similar to the protections offered by the
U.S. Investment Company Act of 1940. UCITS,
or undertakings for the collective investment in
transferable securities, are commonly used investment funds regulated at the E.U. level; they
are covered by Directive 2014/91/EU (July 2014).
Separately, the E.U.s Alternative Investment
Fund Managers Directive (AIFMD) covers the
management, administration, and marketing of
alternative investment funds, including hedge
funds, private equity, and real estate. There is
an alphabet soup of additional vehicles (SICAV,
SICAF, SIF, FCP, SICAR, ICC, PIF, OEIC, etc.)
that may merit discussion with your manager and
consultant. These are usually most appropriate
for larger, global investors.
Sources: FCA and European Commission websites

Created when a plan sponsor directly engages an investment manager. Assets not pooled or commingled with those
of other entities. Liquidity varies based on client investment
guidelines or specific mandate, and plan sponsor maintains
full authority to determine whether securities lending is permitted. Requires unitization when deployed in open-architecture DC plans. Pros: Plan sponsor has total control over
the investment mandate, guidelines, custody of assets, and
voting rights. Very transparent and usually the lowest-cost
option for those eligible. Cons: Separate account minimum
investment requirements are generally significantly higher
than commingled funds. Typically only available to institutional investors or ultra-high-net-worth individuals.

Private Investment Funds and

Special Purpose Vehicles
Include hedge funds, private equity, other alternative investments, and fund-of-funds (multi-manager). Typically structured as limited partnerships/limited liability companies.
Actively managed, with a goal of achieving excess returns
uncorrelated to public markets. May employ leverage, shorting, and derivatives, or pursue strategies like real assets,
venture capital, and buyouts. Manager typically compensated with management plus performance fees. Operate under 3(c)(1) and 3(c)(7) exemptions for Investment Company
Act of 1940. Eligible investors will be limited to accredited
investors, qualified purchasers, and/or qualified clients.
Generally less liquid and/or subject to lock-up conditions,
making them more suitable for long-term investors. Pros:
Typical strategies have the potential for high returns. Manager (but not vehicle) typically subject to SEC examination (if
investing in securities). Cons: Investors have limited control.
Disclosure and transparency (e.g., holdings, fees) typically
poor. Valuations lagged, not readily available. Complex risks,
strategies, and underlying cost structures.

For more information, please visit www.callan.com, email

institute@callan.com, or contact your Callan consultant.
San Francisco

Atlanta

Chicago

800.227.3288

800.522.9782

800.999.3536

Denver

New Jersey

855.864.3377

800.274.5878

April 2015 | 2015 Callan Associates Inc.

* Descriptions and characteristics are intended as an overview, not a fully
comprehensive listing. This report is for informational purposes only and
should not be construed as legal or tax advice on any matter.