Collective Investment Fund Pursues Endowment Style

A new collective investment fund from Alta Trust Company strives to bring an endowment investment philosophy and liquid alternative opportunities to defined contribution retirement plans.

Alta says it partnered with ETF Model Solutions LLC to develop and launch the Endowment Collective Investment Fund. As the firms explain, the Endowment Collective Investment Fund (CIF) seeks to improve risk-adjusted returns of traditional portfolios of stocks and bonds by adding alternative investments. The CIF incorporates asset classes such as private equity, hedge strategies and real assets to create a “three-dimensional portfolio.”

Alta says managers of university endowments, public pension systems, and corporate defined benefit plans have historically utilized lower-correlated alternative investments to improve the risk-adjusted returns of their portfolios. Demand for this style of investing is increasing among DC plan sponsors and participants, according to recent industry research (see “DC Sponsors Drawn to Alternatives”).

Rather than private placements or limited partnerships, the Endowment CIF uses liquid alternative investments, such as exchange-traded funds and mutual funds, to obtain its alternative asset allocations. ETF Model Solutions believes that the three-dimensional approach offers four major benefits when compared to most proprietary target-date or balanced funds, as follows:

  • Added protection for the plan sponsor, as both the trustee and the manager of the CIF serve in a fiduciary capacity;
  • Reduced portfolio volatility compared with portfolios with greater equity allocations, due to its hedge strategy holdings;
  • Protection from inflation due a greater allocation to real assets, such as commodities, precious metals, real estate and infrastructure investments; and
  • Lower interest rate risk due to a smaller allocation to fixed income investments.

The Endowment CIF utilizes a core-satellite portfolio construction with low-cost, cap-weighted equity and fixed-income ETFs comprising the core allocation, with fundamentally-weighted funds utilized in an attempt to gain alpha. The strategically-managed Endowment CIF is presently targeted to an allocation of 40% global equity, 20% global fixed income and 40% liquid alternative investments.

Alta maintains selling agreements with most major retirement plan platforms, thus plan advisers can likely offer the Endowment CIF to their plan sponsor clients through their existing platform relationships, according to the firm. Plan sponsors can add the Endowment CIF to their retirement plans through a simple participation agreement, according to Alta, while also maintaining their current third-party administrator and recordkeeping relationships.

CIFs are pooled investment funds available only to qualified retirement plans, such as defined contribution 401(k) and defined benefit plans, and are regulated by state and federal organizations, such as the U.S. Office of the Comptroller of the Currency (see “Time to Consider a Collective Trust?”).