One manager's decision to convert a CIT into a mutual fund

In June 2008, SKBA Capital Management LLC launched a daily valued collective investment trust in its flagship ValuePlus equity strategy, which focuses on dividend-paying companies. The initial capital for the fund came from employee contributions.

On Dec. 2, 2013, SKBA completed the conversion of this CIT into a mutual fund format, the Baywood SKBA ValuePlus Fund, with two share classes, institutional and investor.

The case for starting a CIT seems clear, given the low-cost structure. Not so clear is why a money manager would convert a CIT into a mutual fund.

SKBA made the decision to convert to a mutual fund for several reasons.

Certainly CITs are often lower cost than an equivalent mutual fund, in part due to the fact that CITs do not need to be registered with the Securities and Exchange Commission and face fewer regulatory costs.

We found the fund's distribution options somewhat limited, however, in that only ERISA and employee benefit plans (both defined benefit and defined contribution plans) were eligible to purchase shares of the fund.

While we desired to target the pension and 401(k) plan market, we also found interest expressed in the fund's characteristics among prospective taxable clients. The CIT format made the fund ineligible for use in taxable accounts, individual retirement accounts, many fund-of-funds applications, trust accounts, business operating funds and wealth management accounts.

After marking its five-year performance record, we decided it was time to broaden the fund's distribution channels: We converted it into a mutual fund.

While the CIT was included in a number of searches as a DC plan option, we discovered many institutions still view employees' ability to easily access information on mutual fund price and performance with the readily recognizable ticker as a very important feature.

In fact, our existing institutional shareholders supported our decision to convert to a mutual fund format.

In addition, we were able to keep the entire share price history intact with the conversion. Plan participants who own shares in the fund saw the same share price level and share ownership the day of the conversion as the night before, providing simplicity and complete transparency.

CITs are often a lower-cost option than mutual funds. Once we made the decision to convert to a mutual fund, we purposely chose to keep the mutual fee structure the same as for the CIT.

For example, the institutional class expense ratio is capped at 70 basis points, the same level as for the CIT, not higher. This was a business decision to make the new fund completely transparent to the shareholder. Yes, that means our break-even asset level is higher than before, but from a strategic perspective, this is the appropriate decision for our company's long-term growth.

While we would not suggest that such a conversion is always the best alternative, as a boutique investment manager, this was the right choice to make ValuePlus strategy available in a wide range of distribution channels.

Andrew Bischel is CEO and chief investment officer of SKBA Capital Management LLC, San Francisco.