Back to posts

Why Common Trust Funds?

June 17, 2022 | Posted in: Insights, Investing, Wealth Strategies

Before founding Diversified Trust, Larry Bryan served as Treasurer and Chief Financial Officer of Le Bonheur Health Systems, and Bill Spitz served as Treasurer and Vice Chancellor for Investments of Vanderbilt University. Both men frequently received questions from friends and colleagues who wanted to know how they could invest like larger institutions. Regrettably, both founders regularly disappointed their friends with the hard truth that they knew of no investment firm which could provide a good solution at the time. The good news was that Bill recognized that one potential answer for this challenge would be to establish a trust company which could utilize common trust funds (CTFs) to help many of these individuals invest with the scale and access of the largest institutions. Of course this now meant that Larry was going to have to start such a company.

Registering as a state-chartered trust company in Tennessee gave Diversified Trust the ability to establish common trust funds (CTFs) for our clients as well as to provide certain other needed services. Aggregation through CTFs helped narrow some of the gap experienced between many individual investors and larger institutional investors in terms of both costs and investment manager access. By commingling client assets in CTFs, we are able to reduce overhead costs and negotiate better access and investment expense arrangements with external managers. We pass those savings directly through to our clients, potentially improving upon their net of fees investment return.

Our investment team constructs CTFs for multiple sub-asset class exposures, using either a single underlying separately managed account or several. By controlling the weights of the underlying managers, our investment team can efficiently make marginal shifts in the composition of the fund to manage the risk/return profile more effectively. CTFs are regulated by the Office of the Comptroller of the Currency (OCC) rather than the Securities and Exchange Commission (SEC). Not having to register with the SEC reduces compliance costs, and there are no underlying marketing expenses since Diversified Trust’s CTFs are only available to our clients. Our CTFs are monitored by the Tennessee Department of Financial Institutions (TDFI) and annually audited by an independent professional auditor.

As our firm has grown over the past 28 years, the offerings of our investment platform have expanded beyond the original slate of CTFs to include mutual funds, exchange traded funds, and limited partnerships. Before investing a client’s assets in CTFs we make sure they understand why there are cases where we prefer using this particular vehicle and areas where another solution might make more sense. Clients who enjoy being able to look up their positions on websites such as Morningstar or Yahoo! might prefer to use mutual funds and exchange traded funds. Those who are particularly focused on driving down investment costs might find CTFs to be a more appealing option.

Clients who invest in CTFs will receive 1099s and K-1 tax reports. CTFs can be managed with a focus on tax efficiency as specific tax lots are used for rebalancing, and Diversified Trust’s investment operations team can manage semi-monthly inflows and outflows to meet liquidity needs without increasing portfolio turnover. Unlike mutual funds, CTF capital gains are recognized as incurred but are not required to be distributed. Nevertheless, pass-through gains and losses still increase/decrease the cost basis of the CTF.

Often when we are talking with new clients about our investment philosophy and platform, they are learning about CTFs for the first time. Despite their apparent novelty, CTFs have been around for nearly a century. As fiduciaries, we appreciate having multiple tools at our disposal to customize an allocation which meets our clients’ investment goals as we manage their assets through time.