Commingled Fund

What Is a Commingled Fund?

A commingled fund is a portfolio consisting of assets from several accounts that are blended together. Commingled funds exist to reduce the costs of managing the constituent accounts separately.

Commingled funds are a type of pooled fund that is not publicly listed or available to individual retail investors. Instead, these are used in closed retirement plans, pension funds, insurance policies, and other institutional accounts.

Understanding a Commingled Fund

Commingling involves combining assets contributed by investors into a single fund or investment vehicle. Commingling is a primary feature of most investment funds. It may also be used to combine various types of contributions for various purposes

In many ways, commingled funds are similar to mutual funds. Both are professionally managed by one or more fund managers and invest in basic financial instruments such as stocks, bonds, or a combination of both.

Also, like mutual funds, commingled fund investments benefit from economies of scale, which allow for lower trading costs per dollar of investment, and diversification, which lowers portfolio risk.

Oversight of Commingled Funds

One major and important difference, however, is that commingled funds are not regulated by the Securities and Exchange Commission (SEC), which means they are not required to submit a variety of lengthy disclosures. Mutual funds, on the other hand, must register with the SEC and abide by the Investment Company Act of 1940.

Commingled funds are not completely devoid of oversight, though: They are subject to review by the United States Office of the Comptroller of the Currency, as well as individual state regulators.

While mutual funds have a prospectus, commingled funds have a Summary Plan Description (SPD). SPDs offer more detail, describing the fund's objectives, investment strategy, and background of its managers. The SPD document states the rights and obligations that the plan participants and beneficiaries can expect. Any participant in a commingled fund should read the SPD carefully.

Advantages and Disadvantages of Commingled Funds

The lower degree of regulation results in lower legal expenses and operating costs for a commingled fund. The lower the costs, the less drag on a fund's returns. If a commingled fund and a comparable mutual fund post the exact same gross performance, the commingled fund's net return would likely be better because its expenses were lower than the mutual fund's.

A disadvantage of commingled funds is that they do not have ticker symbols and are not publicly traded. This lack of public information can make it difficult for outside investors to track the fund's capital gains, dividends, and interest income. With mutual funds, this information is much more transparent.

Example of a Commingled Fund

Like a mutual fund, the Fidelity Contrafund Commingled Pool has a portfolio manager and publicly discloses pertinent information via quarterly reports. It focuses on large-cap growth stocks, with major weightings in information technology, communication services, consumer discretionary, financial companies, and health care.

The Contrafund Commingled Pool has a 0.43% expense ratio, which is lower than the average expense ratio of mutual funds — including its mutual fund counterpart, the Fidelity Contrafund, with its .86% expense ratio. Since its inception in 2014, the fund has delivered an annualized return of 15.85%, versus the 14.12% produced by the S&P 500 index.

Illegal Commingling

In some cases, the commingling of funds may be illegal. This usually occurs when an investment manager combines client money with their own or their firm's, in violation of a contract.

Details of an asset management agreement are typically outlined in an investment management contract. An investment manager has a fiduciary responsibility to manage assets according to certain specifications and standards. Assets agreed to be managed as separate cannot be commingled by the investment advisor.

Other situations may also arise where contributions provided by an individual or client must be managed with special care. This can occur in legal cases, corporate client accounts, and real estate transactions.