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Institutional investors continually look for ways to bring efficiency and accuracy to their investment portfolios. One way to do this can be through the use of unitization.

Here are three things you should know about unitization.

Q: What is unitization?

A: Unitization is the process of creating an unregistered ‘fund’ (similar to a mutual fund) for an investor allowing for easier support of sub-accounts — smaller, affiliated entities that are part of a larger, main pool of assets). Assets of the main investment pool are aggregated together and valued daily, striking a daily unit value (NAV) for the fund. Each sub-account then holds units of that larger fund.

A unitized fund acts like a mutual fund but is not legally registered; no prospectus, no board of directors, etc. It can only be used for assets that are part of the same pool.

Q: What are different uses for unitization?

A: By unitizing assets, multiple sub-accounts can aggregate their funds to create larger investments. One reason to unitize is for managed accounts with high minimums, with complex implementations, and/or for security screening, which is not easily applied to smaller asset pools. Aggregating assets allows for meeting higher required minimums, and is especially helpful when screening, as managers are able to screen on fewer accounts that have higher balances. Also, it is not efficient to implement complex mandates on small accounts.

Another reason to unitize is for alternatives. As the required paperwork for these investments is typically complex, it can be beneficial to have multiple affiliated investors aggregate their balances and complete one set of documents, as opposed to each individual investor completing a set of documents.

Q: What are the benefits of SEI for unitization?

A: There are many benefits.

  1. Standardized allocations – Each sub-account owns a single fund, so there is no deviation of investment strategy and performance. It's as though each fund was a discrete model.
  2. Operational efficiency – We manage the asset allocation for one entity (investment portfolio) and not multiple sub-accounts.
  3. Trade automation – We obtain a CUSIP for the unitized product and automate trading between the sub-accounts and the transfer agency (leveraging NSCC). NSCC is a leading provider of centralized clearing, risk management, information and settlement services to the financial industry.
  4. Data integration/reporting – We administer the unitized asset exactly like any other U.S. mutual fund. We automatically deliver position information to our internal investment team, allowing our analysts to monitor the unitized funds via Aladdin, FactSet and other portfolio management systems. Also, we can produce a monthly accounting report from FIS to show how the fund operates, including recording buys, sells, income, etc.

Summary

Investment teams and those responsible for managing institutional portfolios have a lot on their plates. Taking advantage of the right technologies and resources can bring efficiency and help ensure accuracy that your can't otherwise achieve.

Learn more about our solution, Enhanced CIO.

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Legal Note

This information is provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company (SEI). Investing involves risk including possible loss of principal. There can be no assurance that your investment objectives will be achieved nor that risk can be managed successfully. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Bonds and bond funds will decrease in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only and should not be interpreted as legal opinion or advice.