Although every situation is a little different, there are some common issues where a pooled investment vehicle can be an excellent solution. The two primary situations fall into two categories, and sometimes both:  1) where a fund can create operating efficiencies by combining smaller accounts together in a single fund or account; and 2) where a fund can make combining different types of accounts into a single fund.

There are tradeoffs in almost all decisions in life. Very seldom is there a one size fits all solution. The fastest way to get somewhere might be to have your own helicopter, but that is also probably the most expensive solution, so all the factors go into deciding what mode of transportation is your best option. A similar set of tradeoffs help determine if a pooled vehicle is a good solution for your firm or entity, and then the best investment vehicle to meet your set of circumstances.

The circumstances differ frequently based on what type of entity may or may not need a pooled investment vehicle:

Investment advisory firm

When new investment advisory firms are formed, invariably smaller accounts are taken either as “exceptions” to the firm’s stated minimum account size, or from friends and family that want to be both supportive and gain access to the firm’s expertise.  And, frankly, start up firms typically scramble to get to those critical asset levels where efficiency starts to kick in, and will often take more exceptions in the early months and years.

Once the new firm gets good traction and everything starts falling into place, the number of accounts managed by the portfolio managers, and administered by the advisory firm’s back office becomes a time and resource issue.

There is also the issue of all portfolios being treated equally. While there are separately managed account platforms where trades can be allocated across all accounts, there is still an issue of fractional shares, timing of when each account becomes a client meaning different cost basis for every security for each client, accounting issues, performance issues, a myriad of often non-considered criteria.

If the decision is made, “Yes, a fund would make our administrative life easier, and help to manage all portfolios identically” then the next conversation is “what type of fund makes the most sense. The criteria relate to a number of factors, including:

  • Are all clients or prospective clients’ accredited investors?
  • How many clients do you project ? (if over 100 then a private fund has challenges)
  • Is there a mixture of qualified retirement plan client assets, and individual taxable accounts?
  • Does your investment style include all listed securities, or do you also hold alternative more difficult to price and trade securities?
  • Like with most considerations, there are variations, so a consultative approach to each situation is best.


Foundations and endowments

Tracking charitable remainder trusts and other gifts

Many of the same issues of accounting efficiency are drivers for foundations and endowments.  Most charitable organizations depend on contributions from friends and benefactors. Gifts can come with any number of caveats and conditions. For example, a university might receive a gift where the deed of gift or other governing instrument may say “distribute 10% of the income to the Economics Department, and reinvest all capital gains”.

Charitable remainder trusts are a popular form of gift. With a CRT the donor will receive income from the gift during their lifetime, at which point the corpus of the CRT will go to the beneficiary organization. There can be many variations of these type gifts, but there is a common denominator – there is a need to accurately track the original principal, realized and unrealized gains and losses, and interest and dividend income received.

There are two ways to track these items. An administratively onerous way is to keep every gift separate. This works from an accounting standpoint, although significant personnel costs are required to track each gift separately. Investment of these assets would also be next to impossible, certainly with any efficiency at all.

The second way is to pool all the gifts together in one or more investment pools, and to unitize each pool. Unitization by its very principal and design tracks 1) original cost basis/principal; 2) realized and unrealized gain and loss; and 3) undistributed net income. Each of these items is tracked on a per share basis, so with the highest level of accuracy available, each account knows on any given day what its accounting status is on each item. This makes tax reporting for the donor/beneficiary far easier.

Combining endowment and organization’s retirement or other operating assets

Foundations and endowments, especially large church or church related organizations, have not only the issue of smaller charitable gift management and efficiency, but also how to manage the organization’s retirement plan assets and other operating funds.

To avoid having multiple investment pools, or to consolidate those pools for efficiency and economies of scale can also be handled with unitized accounting. Each account, subaccount, and in some cases subaccount of subaccount (for a particular church’s fund for the music program, for instance) can be accounted for with maximum accuracy and the assets can be combined for operating and investment efficiency.

There are many variations of this model as well, but it is a proven successful solution for the charitable community.