Exclusive

CEO says new funds can be started in minutes, not months, at a fraction of the cost of a mutual fund.

Earlier this month The Trust Advisor reported Westwood Holdings Group, Inc. (NYSE:  WHG), through its trust company unit Westwood Trust, helped forge gains by landing large new accounts while other firms sat on the sidelines. Westwood managed to bring in $2 billion in new assets during the toughest year in recent financial memory.

As part two of our report on Westwood Trust, I had an opportunity to chat once again with Brian Casey, President and CEO of Westwood, to drill down into the topic of interest to most wealth advisors – common trust funds.

New Money from an Old Idea

Simply stated, common trust funds or “CTFs” permit the commingling or pooling of investors’ money into one account (known as a common fund) for the purpose of creating a single investment. In other words, they are much like a mutual fund. They actually pre-date mutual funds so they are an old concept. Since they are a bank product, CTFs are not required to be registered with the Securities and Exchange Commission and they are not considered to be a security under state and federal securities laws. They are regulated under OCC Regulation 9 (12 CFR 9.18) and are supervised by state or federal bank regulators.

Casey says there are two types of CTFs. The first are common trust funds or CTFs, a product of a bank or trust company established as a convenience to the trust client. The second are collective investment funds or CIFs. These are utilized primarily by large qualified plan sponsors who are seeking institutional pricing for a large pool of retirement assets such as 401ks.  They strike an NAV daily and trade on Fundserve.   Casey adds, “We actually have one of these that we developed for a Fortune 100 company 401k plan and the data is available in Morningstar.”

But Westwood’s power products are the CTFs, common trust funds. They are private and only available to clients of Westwood Trust. Casey says that “they are only available to our clients who have a bona fide personal trust relationship with the trust company.” Their minimum account size is $2 million which can be either a taxable or retirement account. But, in other words, to benefit “you have to be a trust client and have seven figures with us to be part of the club.”

According to the Westwood’s 10K quarterly report for the year ending September 30, 2009, $1.4 billion of its $9.5 billion or 15% of its assets under management are held in common trust fund relationships.

The Strategies

Westwood runs 31 separate common trust funds which are based on 15 asset classes. Casey adds, “With institutional quality and thoughtful asset allocation, the client is given a better shot of achieving what it is that they’re trying to do than picking a mutual fund off a list.”

To the client, “expenses matter.” With a CTF the only charge is a management fee.  There is no legal, accounting,  transfer agent or fund supermarket fees that are normally part of a mutual fund fee structure.

Westwood offers five different “flavors” of value. This includes small-cap, all-cap, large-cap , mid‑cap and smid-cap value. As for income, they offer five types of income products including investment grade bonds, REITs, High Yield and two unique income funds.

They have an esoteric type of fund called the Income Opportunity Fund. This allows them to participate in a company through different parts of its capital structure. This might include, for example, a high dividend paying common stock, a preferred stock, or part of a company’s debt in the form of a bond. Or, they might own royalty trusts or MLPs.

They just started a popular Global Diversification Fund CTF. The strategy on this vehicle is to focus on investor purchasing power protection. Casey remarks, “As U.S. citizens, we have a lot of obstacles that could diminish the purchasing power of our savings, like inflation or the potential decline of the U.S. dollar.” This fund might hold global TIPs or treasury inflation protected securities, global bonds, gold, and other types of commodities.

While Westwood manages all of the domestic value and income funds, Westwood employs outside subadvisors chosen by Westwood’s investment committee with assistance from an outside consulting firm. To manage the domestic growth funds, Westwood uses William Blair in Chicago as their subadvisor.

For International Value, Westwood uses Lazard based in London and for International Growth, Westwood employs Martin Currie based in Scotland. The fees paid to subadvisors come out of Westwood’s pocket as opposed to any additional fee to the client.  Casey says, “Asset allocation is critical to long-term investment success.”

Westwood is a world-class investor in the value and income space, but we recognize that investors need access to both domestic and international strategies to complete their asset allocation plan.  We have a talented consultant on retainer and an experienced investment committee to help us identify best in class subadvisors.”

Technical Items

A major part of hosting a selection of common trust funds servicing close to $1.5 billion is the technology platform. The two major factors that must be considered for any common trust fund trust accounting systems are (1) to keep track of each investors holding and (2) to be able to strike a daily NAV calculation for each fund.

Westwood uses a trust accounting system called Infovisa. Casey said they have been working with Infovisa for over 10 years and they deliver a “great system.” He remarked that the folks that started Infovisa came out of SunGard.

SunGard offers two trust accounting systems to support CTF processing. The two systems are: Charlotte, which is utilized primarily by firms with zero to US$2 billion in trust assets. Customers include smaller community banks and private trust companies as well as startup firms. The other is AddVantage, which is typically used by large regional and national banks, with no theoretical size maximum in terms of assets, transactions, or users.

Each of the systems has been designed to work in conjunction with SunGard’s wealth management platform solution, Wealth Station. The trust platforms are also able to utilize the trade execution and compliance tools of the SunGard Transaction Network (STN).

Advent also offers a common trust fund system. It is actually a mutual fund system, but may be used to keep track of CTFs.

Taking  Action

Common trust fund arrangements offer clients lower fees than mutual funds. That together with the enormous flexibility to create a pooled investment vehicle in minutes means that CTFs are likely to become an important part of the investment landscape.

The ease with which a trust company can be established in South Dakota, Nevada or Delaware by investment managers, has made inroads to this field, establishing a kind of “turnkey” service, which allows investment managers and plan administrators to easily establish new common trust funds arrangements.

Advisors Institutional Services (www.advisorsinstitutional.com), which I support, helps wealth managers, advisors, broker-dealers, law firms, and pension plan administrators create and operate trust companies in South Dakota and Nevada. This can permit an advisor to replicate the Westwood Trust business model.

The firm offers a complimentary special report called Launching a South Dakota Trust Company Guide to Operating Nationwide which is available on-line at (www.advisorsinstitutional.com/s/southdakotareports.asp).

Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes contributed to the research.