Reflect on the purpose of the investment. Where does it fit into your overall portfolio, and what role is it intended to play? Are there any benchmarking issues or asset class requirements? How quickly do you need to implement? What is your projected holding period?

Consider the fund’s size and scope. Have you con-sidered potential exposure and minimum investment re-quirements? What would be your percentage of owner-ship of the fund? How many total investors are in the fund and how concentrated is the ownership?

Examine the liquidity and risks of the fund against your plan’s needs and requirements. What is the valu-ation frequency? Are there any redemption or investment restrictions?

Review governance issues and understand their impli-cations. What agencies have regulatory oversight and at what level of scrutiny? Who is the trustee/custodian/admin-istrator and are there additional service providers or direc-tors? What are the permissible investments? Is securities lending permitted? What is the legal form of the fund? What is the country of domicile?

Understand the ownership structure. Who has owner-ship of the underlying securities or units of the fund? Who retains voting rights? Is fund “look through” available? Do you have control?

Assess the “big picture” of the fund’s fees, expenses, tax and accounting implications. What is the fee struc-ture? What are the ramifications of tax requirements? What are the explicit and implicit costs embedded in the structure? What will be reflected on your financial books (shares or units, or securities held as assets of the fund), and how will you handle valuation?

TheInvestment VehicleOwner’s Manual

When you are buying a car, it is rare to find a “perfect” vehicle. However, with a methodical approach you can usually drive away with one that meets your specific requirements. Selecting the right investment vehicle can pose similar challenges. There are many different types of investment vehicles available, and it takes work to understand their parameters, their regulatory backdrops, and their advantages and disadvantages.

In this charticle we propose key questions that institutional investors should consider before they jump in the driver’s seat. On the reverse, we provide a road map of some of the most popular investment vehicles among U.S.-based investors.

Asking the Right QuestionsAll key decision-makers should take the time to dig into the details when selecting an investment vehicle. Choosing wisely—and understanding all of the implications, benefits, and potential risks—can be crucial to the long-term success of your portfolio.

First, “know thyself.” Each investor situation is unique. Is your or-ganization a public, corporate, or Taft-Hartley pension plan; a de-fined contribution plan; or an endowment or foundation? Review the broader issues, then consider the characteristics of your spe-cific plan or organization and its legal guidelines and restrictions. Reflect on what you have learned thus far in the manager search process, as well as what past experience may have taught you. Having a clear sense of your own situation before you embark on vehicle discussions with a manager can be enormously helpful. Then, consider the six issues below.

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These questions should steer the conversation in a productive direction and help ensure a smooth transition. Your legal team and investment consultant can also provide helpful insights and guidance.

0%

20%

40%

60%

80%

100%

91%

52% 48%

22%4%

Institutionalseparateaccounts

Collectivetrustfunds

Institutional-class

mutal funds

Limitedpartnerships

Fund-of-funds

Institutional separate accounts38%

Collectivetrust funds22%

Exchange-traded funds 3%

Institutional-class mutual funds 29%

Limited partnerships 5%Fund-of-funds 4%

Note: Separate accounts are typically used for large institutional clients ($100 million+).Source: Cerulli Associates, 2012, in partnership with Institutional Investor Institute

Note: Components do not sum to 100% due to rounding. Source: Cerulli Associates, 2012, in partnership with Institutional Investor Institute

Asset Manager Vehicles Used in Product Development

Investment Consultants’ Client Asset Allocation (by Vehicle Type)

Regulator, Trustee, Custodian • Valuation Frequency, Settlement Cycle • Transparency of Underlying Holdings

Institutional or Retail • Qualified or Non-Qualified under ERISA • Tax-Exempt or Taxable Investor

Investment Minimums • Asset Size Constraints • Market Capitalization Considerations

Active or Passive • Holding Period • Resale or Transfer Limitations

Investment Policies and Guidelines • Ownership Interest, Voting Rights • Securities Lending

Sole Investor or Collective Ownership • Redemption Gates, Lock-ups or Restrictions

Published, Sliding Scale, or Relationship Rates • Explicit/Implicit Costs • Performance Based Fees

Visibility

Eligibility

Hurdles

Idiosyncrasies

Control

Liquidity

Expenses

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VehIcle checklist

San Francisco Atlanta Chicago800.227.3288 800.522.9782 800.999.3536

Denver New Jersey 855.864.3377 800.274.5878

Global Investment Options

The European Union (E.U.) has sought to estab-lish a single regulatory framework for openended funds in order to provide higher levels of investor protection, similar to the protections offered by the U.S. Investment Company Act of 1940. UCITS, or “undertakings for the collective investment in transferable securities,” are commonly used in-vestment funds regulated at the E.U. level; they are covered by Directive 2014/91/EU (July 2014).

Separately, the E.U.’s Alternative Investment Fund Managers Directive (AIFMD) covers the management, administration, and marketing of alternative investment funds, including hedge funds, private equity, and real estate. There is an alphabet soup of additional vehicles (SICAV, SICAF, SIF, FCP, SICAR, ICC, PIF, OEIC, etc.) that may merit discussion with your manager and consultant. These are usually most appropriate for larger, global investors.

Sources: FCA and European Commission websites

April 2015 | © 2015 Callan Associates Inc.

* Descriptions and characteristics are intended as an overview, not a fully comprehensive listing. This report is for informational purposes only and should not be construed as legal or tax advice on any matter.

Mapping the Investment VehiclesYou have considered your unique needs and restrictions and reviewed several important questions. Now, use this overview* of institutional investment vehicles to help you steer your portfolio toward success.

Also available to retail investors

Regulated by the SEC as a “40 Act” fund

Overseen by federal and state banking regulators, the Office of the Comptroller of Currency, and/or the Department of Labor

Securities lending permitted, although each situation will have unique restrictions

Control/transparency

leg

end

For more information, please visit www.callan.com, email institute@callan.com, or contact your Callan consultant.

Mutual Funds Each investor in the fund owns shares of the fund but does not own a pro-rata share of the underlying securities. Share classes may be issued per type of investor, each class with different fee structures. Typically, operating expenses are paid out of fund assets and fees paid by investors indirectly. The SEC requires a minimum 85% of assets in liquid securi-ties. Securities lending may be permitted, but total assets on loan are limited to 33 1/3% of value of total fund assets. Daily valuation. Pros: They are highly liquid, diversified portfolios and are accessible/affordable for smaller investors. They are subject to more extensive disclosure requirements than any other vehicles. A board of directors (including at least a majority of “independent” directors) oversees a mutual fund. Both governance and legal structure are subject to require-ments and restrictions of the 40 Act. Fund information is eas-ily accessible via ticker symbol. Cons: No investor control of investment guidelines. Institutional-class share fees are generally higher than those of other vehicles for similar man-dates although a series trust may offer lower fees. Owner-ship of more than five percent (5%) of the shares may raise complex affiliation issues.

Collective Investment Trusts (CITs) and Common Trust Funds (CTFs) Maintained by a bank or trust company acting as trustee that pools trust assets of qualified employee benefit plans (as defined by ERISA) such as pension, profit-sharing, re-tirement, or other trusts—lowering costs through econo-mies of scale. A bank administering a collective fund may retain an affiliated or unaffiliated custodian or registered in-vestment advisor (subject to prudent delegation and over-sight as required). Some plan types, including IRAs, 403(b) plans, and VEBAs, may not invest in CITs. Fees are gener-ally negotiable and include investment management, cus-tody, and valuation services. Liquidity at trustee discretion within certain parameters. Common trust funds, a similar vehicle, are also operated by a trust company or bank acting as a trustee to pool as-sets, but often only tax-exempt entities can participate [i.e., 501(c)(3) non-profits, endowments and foundations, hos-pitals, health and welfare plans, and VEBAs]. CTFs often facilitates trust services. Oversight is by the bank’s trust department, and is subject to the bank’s primary regula-tors. Pros: Exempt from SEC registration, contributing to a cost structure that is generally lower than that of mutual funds. Plans without the scale to access separate accounts can utilize collective vehicles, often with the same portfolio mandates. Some asset classes are available through CITs but not mutual funds, such as direct real estate. Cons: Generally fewer investment choices than mutual funds. Of-ten not traded on an exchange, which can make tracking performance and characteristic information difficult.

Private Investment Funds and Special Purpose VehiclesInclude hedge funds, private equity, other alternative invest-ments, and fund-of-funds (multi-manager). Typically struc-tured as limited partnerships/limited liability companies. Actively managed, with a goal of achieving excess returns uncorrelated to public markets. May employ leverage, short-ing, and derivatives, or pursue strategies like real assets, venture capital, and buyouts. Manager typically compen-sated with management plus performance fees. Operate un-der 3(c)(1) and 3(c)(7) exemptions for Investment Company Act of 1940. Eligible investors will be limited to “accredited investors,” “qualified purchasers,” and/or “qualified clients.” Generally less liquid and/or subject to lock-up conditions, making them more suitable for long-term investors. Pros: Typical strategies have the potential for high returns. Man-ager (but not vehicle) typically subject to SEC examination (if investing in securities). Cons: Investors have limited control. Disclosure and transparency (e.g., holdings, fees) typically poor. Valuations lagged, not readily available. Complex risks, strategies, and underlying cost structures.

Unique custom Vehicles

Single mingle: A collective fund with a single owner, a solution devised by Callan in the late 1990s. Typically is a subset or sleeve of a larger commingled fund. Gives a single investor con-trol of proxy voting, class actions, and securities lending parameters. Underlying portfolio man-agement similar to the larger commingled fund. Only available to mega institutional investors.

Mutual fund of one: Similar to the concept of the “single mingle,” but created using a mutual fund construct. Typically a different share class or series of an institutional share class, but devel-oped for a single institutional investor, company, or common affiliated entities. Must comply with all mutual fund regulatory guidelines.

Institutional Separate AccountsCreated when a plan sponsor directly engages an invest-ment manager. Assets not pooled or commingled with those of other entities. Liquidity varies based on client investment guidelines or specific mandate, and plan sponsor maintains full authority to determine whether securities lending is per-mitted. Requires unitization when deployed in open-archi-tecture DC plans. Pros: Plan sponsor has total control over the investment mandate, guidelines, custody of assets, and voting rights. Very transparent and usually the lowest-cost option for those eligible. Cons: Separate account minimum investment requirements are generally significantly higher than commingled funds. Typically only available to institu-tional investors or ultra-high-net-worth individuals.

Series TrustsUsed by mutual funds to form one legal entity with one board of directors, one set of officers, and a single registration, but with many separate, marketable series. Offered as a turnkey solution, with trust and operational components already in place. Pros: Substantial time and cost savings in fund setup. Funds are subject to more extensive disclosure requirements than any other comparable financial product. Generally less expensive than mutual funds but more expensive than CITs or CTFs. Cons: Limited structure and design flexibility.

Exchange-Traded Funds (ETFs)Investment companies whose shares are securitized and traded intraday on stock exchanges at market-determined prices. The “creation basket,” a daily listing of specific securi-ties and quantities held by the fund, allows certain large bro-ker-dealers (“authorized participants” or APs) to buy blocks of new ETF shares (creation units) directly from the fund versus delivery of the replicating basket of securities. AP can also redeem ETF shares to receive the corresponding underlying basket of securities. The creation/redemption pro-cess is what allows ETF market makers to provide intraday liquidity in the ETF. There is an annual management fee and the trade broker also charges a buy/sell commission. Pay attention to varying liquidity and spread prices. Governance and legal structure similar to a mutual fund. Pros: Daily hold-ings transparency. Real-time intraday NAV and liquidity. Cer-tain tax efficiency advantages for taxable investors. Cons: Embedded transaction costs due to issuer fees for creation and redemption of units could be high, varies depending on underlying basket of securities being replicated.

Unit Investment Trusts (UITs)Hybrid pooled vehicles with characteristics of both mutual funds and closed-end funds. They typically issue a specific, fixed, redeemable number of shares, called “units.” The in-vestment portfolio is not actively traded. Instead, a set of investments is bought and held until the termination date, when the trust dissolves and proceeds are paid to share-holders. Liquidity is subject to secondary market, but typi-cally the fund should not have to liquidate securities to meet sale transactions. Securities held in a UIT generally remain static, which allows investors to know the composition of the portfolio, fees, and scheduled maturity date. Pros: Typi-cally have lower expenses than “open-ended” funds and may generate fewer capital gains taxes than traditional mu-tual funds, but are subject to 40 Act. Cons: Fixed termina-tion date; may liquidate at an inopportune time. No board, corporate officers, or investment advisor. Fewer investment options than mutual funds. May have limited number of se-curities, so more susceptible to price volatility than a less-concentrated portfolio. Typically high distribution fees borne by investors.

Closed-End FundsThese funds sell a fixed number of shares at one time (in an IPO) that later trade on a secondary market, although some are structured as “interval funds” with a continuous offering and periodic redemptions. They list on an ex-change and trade like a stock but are registered under the 40 Act and subject to limitations in governance and structure. Market prices fluctuate daily, often much higher or lower than the NAV of fund assets (vs. ETFs, which typically closely track NAV). Liquidity is subject to second-ary market, and (unless structured as an interval fund) the fund would not have to liquidate securities to meet sale transactions. Can have persistent price premium/discount to NAV. Pros: To redeem shares, investors must sell on an exchange to a buyer (except for interval funds), so the fund manager may not need to sell any underlying stock, reducing transaction costs for remaining investors. Cons: Price fluctuations are typically more volatile than other collective investment vehicles. Liquidity is dependent on market conditions except for interval funds.