What Is a Commingled Fund?

Commingled Fund

A portfolio comprising of assets mixed from various accounts is known as Commingled Funds. These funds reduce the operating costs since the integral accounts are handled separately. These are like a pooled fund which are neither available to retail investors nor listed publicly. But these are generally a part of pension funds, insurance policies, retirement plans, and several other accounts.

Key Takeaways

  • An investment manager collects money from various investors and fuses them into a single fund, commonly known as a commingled fund.
  • Commingled funds are similar to mutual funds as they are also handled by specialized portfolio managers investing in a variety of different securities.
  • Commingled funds are separate from mutual funds in that they are typically unregulated by the SEC.
  • These funds are not listed publicly and are not for individual purchases, which are generally part of accounts like retirement plans, pensions, and insurance policies. 

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Understanding a Commingled Fund

Assets (what the investors contribute) combining into a single investment vehicle or fund is known as commingling. The majority of the investment funds have commingling as a primary feature. It can also be used to blend different contribution types for various purposes. There is a lot of similarity between commingled and mutual funds, and both of them are handled professionally by one or several fund managers. Both the mutual and commingled funds invest in essential investment vehicles like bonds, stocks, or a combination of them. Commingled investments feed on efficient processes reaping cost benefits, which also lowers the per dollar trading costs of assets and diversification, bringing the risks of portfolios.  

Oversight of Commingled Funds

One of the major and the most crucial contrasting thing about commingled funds is that Securities and Exchange Commission (SEC) does not regulate them. Hence, no lengthy disclosures of several types need to be submitted. On the other hand, mutual funds have to register with SEC and play by the Investment Company Act of 1940, making their disclosure requirements more cumbersome. There is a catch, though. Commingled funds are not entirely free but reviewed by the United States Office of the Comptroller of the Currency and the individual state regulators. 

Commingled funds give a Summary Plan Description (SPD) that is more detailed and explains the funds’ investment strategy, objectives, and the backgrounds of the portfolio managers, which is different from mutual funds as they have a prospectus. The SPD documents give out the obligations and rights that the following fund can serve to the beneficiaries and participants. SPD document should be read carefully by the participants of the commingled funds.

What are the advantages and disadvantages of Commingled Funds?

The lowering in legal expenses and commingled fund-related operating costs resulting from a lesser degree of regulation. The dragging on returns of funds lowers if the cost drops. With precise performance in gross when we compare a commingled fund with a mutual fund, a commingled fund provides good net returns as mutual funds have higher expenses than a commingled fund. One major disadvantage related to the commingled funds is that they are not traded publicly, and they don’t include the ticker symbols. Due to the deficiency of information of the public, it leads to difficulty in the tracking of interest income, capital gains of the fund, and dividends by the outside investors. This information is explicit when it comes to mutual funds. Below are the several pros and cons of commingled funds –

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Pros

  1. Professionally managed
  2. Diversified portfolio
  3. Expenses and fees are lower.
  4. Economies of scale

Cons

  1. Illiquid
  2. Less transparent or is difficult to track
  3. Not SEC-regulated
  4. Limited availability

An Example of Commingled Fund from the real world.

Fidelity ContraFund Commingled Pool is yet one real-world example of the commingled fund. Like a mutual fund, it also uncovers the relevant information through quarterly reports, and it does so publicly, and it also consists of a portfolio manager. The Fidelity ContraFund is an equity fund that focuses on communication services, health care, considerable capitalization stocks growth, financial companies, and significant weights in information technology. As assets, it has US$22.6 billion till the 31st of March 2019. Lesser than the expense ratio on average than the mutual funds, the ContraFund Commingled Pool has an expense ratio of 0.43% together with its mutual fund counterpart. The Fidelity Contrafund that is FCNTX, has an expense ratio of about 0.82%. With an annual return of 11.96%, the fund began in 2014. If $10000 has been invested in the fund hypothetically, it will yield worth $18000, while under the S&P index 500, it will be worth $17161.

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Illegal Commingling

The funds of Commingling might be illegal in few cases. This happens when the client’s money is combined with the funds of an investment manager or their firms, thus violating a contract. The information related to the agreement of asset management is outlined in detail in the investment management contract. Asset management is a fiducial responsibility of the investment manager who follows specific rules and standard regulations. The investment guide cannot be blended, so the assets have to be managed separately. In certain situations, the contributions of the client or an individual should be served with special attention. This usually happens in real estate transactions, legal cases, and corporate client accounts.

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