A commingled fund is a portfolio consisting of assets from several accounts that are blended together. Commingled funds exist to reduce the costs of managing the constituent accounts separately.
Commingled funds are a type of pooled fund that is not publicly listed or available to individual retail investors. Instead, these are used in closed retirement plans, pension funds, insurance policies, and other institutional accounts.
Key Takeaways
- A commingled fund accumulates money from several investors and combines it into one fund.
- Like mutual funds, commingled funds are overseen and managed by portfolio managers who invest in a range of securities.
- Unlike mutual funds, commingled funds are typically not regulated by the SEC.
- Commingled funds do not trade publicly and are not available for individual purchase; they feature in institutional accounts such as pensions, retirement plans, and insurance policies.
Understanding a Commingled Fund
Commingling involves combining assets contributed by investors into a single fund or investment vehicle. Commingling is a primary feature of most investment funds and may also be used to combine various types of contributions for diverse purposes.
In many ways, commingled funds are similar to mutual funds. Both are professionally managed by one or more fund managers and invest in securities such as stocks, bonds, or a combination of both.
Like mutual funds, commingled fund investments benefit from economies of scale, allowing for lower trading costs per dollar of investment, and diversification, which lowers portfolio risk.
Oversight of Commingled Funds
One major difference is that commingled funds are not regulated by the Securities and Exchange Commission (SEC), meaning they are not required to submit various lengthy disclosures. On the other hand, mutual funds must register with the SEC and abide by the Investment Company Act of 1940.
Commingled funds are not completely devoid of oversight; they are subject to review by the United States Office of the Comptroller of the Currency, as well as individual state regulators.
While mutual funds have a prospectus, commingled funds have a Summary Plan Description (SPD). SPDs provide detailed information about the fund’s objectives, investment strategy, and the background of its managers. The SPD document outlines the rights and obligations that plan participants and beneficiaries can expect. Any participant in a commingled fund should read the SPD carefully.
Advantages and Disadvantages of Commingled Funds
The lower degree of regulation results in lower legal expenses and operating costs for a commingled fund. Lower costs mean less drag on a fund’s returns, potentially yielding better net returns compared to a similarly performing mutual fund.
A disadvantage is that commingled funds do not have ticker symbols and are not publicly traded. This lack of public information can make it difficult for outside investors to track the fund’s capital gains, dividends, and interest income. Mutual funds offer greater transparency in this regard.
Pros
- Professionally managed
- Diversified portfolio
- Lower fees and expenses
- Economies of scale
Cons
- Illiquid
- Less transparent/harder to track
- Not SEC-regulated
- Limited availability
Example of a Commingled Fund
Similar to a mutual fund, the Fidelity Contrafund Commingled Pool has a portfolio manager and discloses pertinent information via quarterly reports. It focuses on large-cap growth stocks, with major weightings in information technology, communication services, consumer discretionary, financial companies, and healthcare.
The Contrafund Commingled Pool boasts a 0.43% expense ratio, which is lower than the average expense ratio of mutual funds, including its mutual fund counterpart, the Fidelity Contrafund, with its 0.86% expense ratio. Since its inception in 2014, the fund has achieved an annualized return of 15.85%, compared to a 14.12% return by the S&P 500 index.
Illegal Commingling
In some scenarios, the commingling of funds may be illegal, particularly when an investment manager combines client money with their own or their firm’s, violating a contract.
Details of an asset management agreement are usually outlined in an investment management contract. An investment manager has a fiduciary responsibility to manage assets according to specific standards. Assets agreed to be managed separately cannot be commingled by the investment advisor.
Certain situations may also require special care in handling contributions, such as in legal cases, corporate client accounts, and real estate transactions.
Related Terms: mutual funds, investment funds, asset management, diversification.
References
- Fidelity. “QUARTERLY REVIEW: Fidelity® Contrafund® Commingled Pool”.
- Fidelity. “Fidelity® Contrafund®”.
- Fidelity. “Fidelity® Contrafund® Commingled Pool”.
