Last year was a woeful one for many stocks and stock mutual funds, and that has led to the revival of an old product that may have a new allure for investors eager for reassurance that their money won’t be taken for a wild ride.
Merrill Lynch & Co. and several other major brokerage firms are promoting unit investment trusts-fixed portfolios of stocks and bonds that brokers say offer diversification at low cost and the security of knowing exactly what you’ve got.
“Unlike some other investments, you know what you’re investing in before you buy,” say ads for one group of unit investment trusts.
But other than the folks who sell them, few people think stock-market unit investment trusts are a particularly good idea.
“The only advantage is psychological,” says Savvas Giannakopoulos, a financial planner for Cambridge Associates in Franklin, Mich.
Most mutual funds actively manage their investments, buying and selling stocks and bonds in an effort to meet their objectives. But unit investment trusts hold portfolios that typically don’t change during the life of the trust.
“I think the evidence supports buying quality and holding quality, of finding a discipline and sticking with it,” says Stan Craig, national sales and marketing manager for Merrill Lynch Defined Asset Funds.
But critics note that a fixed portfolio of stocks provides no shield against the ups and downs of the market. Moreover, they argue, a fixed portfolio can handcuff investors to stocks that ought to be dumped because of poor performance.
“You’re locking into their picks at one point in time,” says John Markese, president of the American Association of Individual Investors. “If they’re wrong, they have no way to adjust.”
And while annual fees of unit investment trusts are tiny compared with those of most mutual funds, sales charges can be fairly high.
Investors have put more than $87 billion into unit investment trusts, according to 1993 statistics from the Investment Company Institute that are the most recent available.
Bond unit investment trusts still account for the lion’s share of that market, with stock-market unit investment trusts accounting for $8.49 billion of the 1993 total. Typically, stock-market unit investment trusts require minimum investments of just $1,000, or $250 for individual retirement accounts and Keogh accounts.
Some stock-market unit investment trusts have lifespans as long as 25 years. But some of the most popular of the current offerings have much shorter lives.
The Select Ten Portfolio, sponsored by the Merrill Lynch-led group, is a one-year unit investment trust that holds the 10 stocks in the Dow Jones Industrial Average with the highest dividend yields. In addition to Merrill, the other sponsors are Dean Witter, Discover & Co.’s Dean Witter Reynolds Inc., Travelers Groups’ Smith Barney Inc., PaineWebber Group’s PaineWebber Inc. and Prudential Insurance Co. of America’s Prudential Securities Inc.
In large part, investing in the Select Ten Portfolio is a bet that blue-chip companies with depressed share prices will make big gains. As with other unit investment trusts, when the trust reaches the end of its life, investors walk away with whatever gains or losses were made.
Merrill’s Craig argues that active trading of stocks is no guarantee of a good performance, as last year’s mutual fund returns demonstrated. Even counting dividends, the average U.S. stock mutual fund lost 1.69 percent in 1994, according to Lipper Analytical Services Inc.
The firms that sponsor stock-market unit investment trusts also note that unit investment trusts do have the ability to get rid of stocks when they experience a serious financial reversal. Investors are free to redeem their shares at any time based on current market prices of the underlying securities, the firms say.
A big part of the appeal of unit investment trusts is their low annual fees. While median annual expenses at no-load stock mutual funds amount to 1.19 percent, according to No-Load Fund Investor newsletter, stock unit investment trusts typically charge annual fees of less than 0.2 percent.
But sales charges can offset those savings, particularly for people who buy one-year unit investment trusts and roll over their investments into the next year’s offerings.
With the Select Ten Portfolio, the usual sales charge for the first year is 2.75 percent. Investors who then roll over into the next year’s menu pay a 1.75 percent fee. An investor who wanted to participate for five years, a reasonable buy-and-hold strategy, would end up with sales expenses of 9.75 percent.
Craig says the annual management expenses of many mutual funds make unit investment trusts a better deal over five or 10 years. And while no-load funds don’t carry sales fees, many stock mutual funds do have loads in the neighborhood of 5 percent.
But David Homrich, a financial planner and investment adviser in Atlanta, believes those costs are more justified in the case of an actively managed fund. “Why would you pay someone to watch your grass grow?” Homrich asks.
Dave Koprivetz, a 46-year-old employee benefits consultant from Yorba Linda, Calif., is one unit investment trust investor who thinks he’ll buy a mutual fund next time around.
Koprivetz put $10,000 last year in a stock-market unit investment trust sponsored by Dean Witter, but doesn’t plan to reinvest.
“Things can happen that can be negative and there’s no way to pull away,” Koprivetz says. If a stock goes sour, he says, “your basic mutual fund manager will react.”
