6 second take: Investing for retirement is incredibly important, and commingled funds are a great way to do just that.
On paper, commingled funds look like mutual funds and act like mutual funds. But they’re not mutual funds. In a general sense, as the name suggests, a commingled fund combines assets from multiple accounts including mutual funds into one fund.
For investors, commingled funds can be cheaper and offer more diversification than standard mutual funds. Plus, most funds are actively managed and can perform better than mutual funds.
Unlike mutual funds, commingled funds face different regulatory masters and are typically offered only in retirement accounts like 401(k)s. Retail investors can’t purchase these funds.
And since they aren’t publicly traded, they’re not as transparent as mutual funds. Ironically, that could be a good thing because the funds have more investment freedom and don’t have to justify or explain each investment decision. That can translate in higher returns.
Mutual Funds vs. Commingled Funds
Commingled funds are like mutual funds in that they invest in stocks, bonds, and other securities. Plus, both products are professionally managed by a funds manager and charge investors a fee called an expense ratio (among other costs).
The big difference is that mutual funds are regulated by the U.S. Securities and Exchange Commission and are subject to the provisions of the Investment Company of Act of 1940, which basically mandates that mutual funds offer investors extensive and detailed disclosures.
Such detailed reporting requirements can be costly, and mutual-fund companies are happy to pass that cost onto investors in the form of higher expense ratios.
Meanwhile, commingled funds are regulated by the U.S. Office of the Comptroller of the Currency and state regulators, who have a much lower bar for disclosure.
In most cases, commingled funds price only quarterly and the fund’s managers don’t have to report the fund’s performance or its holdings of stocks, bonds, and other tradable securities more than once a year.
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Advantages of Commingled Funds
A standard commingled fund, as compared with a typical mutual fund, offers investors certain advantages that don’t come with higher expenses, fees, or whatever else. The funds hold the best of the best, all blended together into just one account, making the management of the fund more efficient.
This efficiency means lower costs, such as lower expense ratios for investors.
As a result, investors also get to enjoy being in an actively managed fund without having to pay extra for money managers who “actively” try to beat the major U.S. benchmarks like the S&P 500 Index, the Dow Jones Industrial Average (DJIA), or the Nasdaq Index.
The typical expense ratio for a commingled fund is around 0.30 percent. Commingled funds, like mutual funds, offer investors a diversified mix of stocks, bonds, and alternative investments such as real estate and cash. Diversification can lower market risk, as well.
Disadvantages of Commingled Funds
The first drawback is disclosure. Commingled funds aren’t required to provide investors with a detailed prospectus on expenses, holdings, and performance. Instead, the funds provide a summary plan description, which could simply be a one-page overview of a fund’s mission and investment philosophy.
Furthermore, getting real-time performance data online is mission impossible.
Commingled funds don’t carry ticker symbols. They can’t be tracked like regular mutual funds, exchange-traded funds (ETFs), stocks, or bonds. When the data are provided, the information is a full-day old.
Another issue is low liquidity. On average, since the funds aren’t publicly traded and are confined to retirement plans, they don’t hold as many assets as mutual funds do. As a result, in some cases, investors may face restrictions on how quickly and easily they can access their money.
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Is That a Commingled Fund in My 401(k)?
To be honest, I’d never heard of these funds until a few years ago when one popped up in my 401(k) administered by Fidelity, which has a habit of frequently swapping one fund for another inside my retirement account.
For years, I had a large stake in the Fidelity Growth Fund — a simple, bread-and-butter mutual fund invested in blue-chip, large-capitalization stocks (companies with lots of money) like Apple, Facebook, and Google. Now I’m in its replacement — the Fidelity Growth Company Commingled Pool (not a fund).
It has been a constant out-performer for several years despite a slow start when it was first launched.
“Our investment approach is anchored by the philosophy that the market often underestimates the duration of a company's growth, particularly in cases where the resiliency and extensibility of the business model are underappreciated,” according to Fidelity.
“We focus on firms operating in well-positioned industries and niches that we find capable of delivering persistent sales and earnings growth. This approach typically leads us to companies that we think have the potential to unlock shareholder value through either a growth-enhancing product cycle or an internal catalyst such as a turnaround or acquisition.”
“We believe it critical that companies fund their own growth — through the cash they generate — and benefit from management teams focused on creating long-term shareholder value,” it adds.
Liking the Commingled Life
The pool's performance is often judged against its parent, the Russell 3000 Index, which tracks the performance of the 3,000 large-cap, mid-cap small-cap companies in the U.S. It represents 98 percent of all U.S. companies the sell stock to the public.
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The Russell 3000 Growth Index is like a sub-index. It represents the companies that show a high-growth potential.
The pool is highly aggressive with its stock picking, which is why it does so well.
But there’s a downside: The pool falls hard when markets are declining. Its saving grace, though, is that its fund managers have the flexibility to respond quickly to exploit market changes.
Moreover, the pool only charges an expense ratio of 0.43, or $4.30 per $1,000 invested. That’s a nice deal. And despite criticisms that commingled funds lack transparency, Fidelity provides fairly detailed quarterly updates highlighting the top winners and losers, as well as why it’s invested in certain companies it views as opportunities.
And on top of that, it gives an overall outlook on the global and U.S. economies and markets.
The Bottom Line
If you are fortunate enough to have a workplace retirement plan that offers one or more commingled funds, take advantage. These funds are clearly, on average, superior to regular mutual funds when it comes to performance and price. In addition to cost savings, you get active management at a discount.
No wonder the general public can’t buy these things. They seem too good to be true. When the markets are doing well, they really outperform. Just remember that commingled funds are aggressive investors — and sometimes that aggression can get you in trouble.
