Our time has come! The resurgence of UITs

Unit investment trusts feel underappreciated and underutilized – but NICSA’s UIT Committee believes that’s about to change.

What are UITs?

First, a quick refresher on unit investment trusts, for those who haven’t worked with them in a while:

  • UITs are type of commingled investment vehicle regulated by the Investment Company Act of 1940.
  • Unlike traditional mutual funds, they normally have a limited life span, determined at the time the UIT is created.
  • They differ from traditional funds in another key way: they are set up as buy-and-hold vehicles and therefore don’t hire an investment manager to make active decisions. Instead, the UIT’s sponsor selects a portfolio of securities at the time the trust is created, and while the sponsor monitors for significant credit issues, the portfolio will normally stay intact through the life of the trust.
  • Investors who want to liquidate their position in a UIT have 3 options: redeem their shares as they would for an open-end fund, sell their shares in the open market or wait for the trust to liquidate upon its termination date. Sponsors generally provide investors with an option to roll over into a newly-created trust at a reduced sales charge at that time.

Why are UITs appealing today?

Meeting for the first time in Chicago two weeks ago, NICSA UIT Committee members reviewed the advantages of UITs:

  • Complete transparency. Investors always know exactly what they own when they invest through a UIT.
  • Tax efficiency. Because there is no active trading in the portfolio, UITs are very tax efficient.
  • Predictable income. The stability in the portfolio holdings means that the income earned is relatively predictable – particularly when compared to open-end mutual funds, where cash inflows from new investors can create dilution. In an uncertain interest rate environment, this predictability is particularly valuable to fixed income investors.
  • Flexibility. UITs can be created quickly to capitalize on specific investment research ideas or to respond to market shifts.
  • Low operating costs. With no need for an investment manager or related expenses (such as a board of directors to supervise activity), ongoing operating costs are very low. However, UITs charge an upfront fee at the time of creation, which traditionally included a sales load. Because of this upfront fee, UITs’ ongoing cost advantage has generally been overlooked.
  • New structures for fee-based advisers. On the flip side, the structure of this upfront fee has changed to make UITs a more attractive alternative for fee-based accounts, eliminating the sales load component for those accounts.

These benefits haven’t gone completely unnoticed. Assets in UITs have more than doubled in the past 4 years to $60 billion – as investors used UITs to lock in yields in a declining interest environment.

What would increase their appeal?

While it’s an impressive surge, the historical data suggests that there’s potential for further growth. In 1990, this was a $100 billion industry, with twice as many UITs outstanding than there are today.

Members of NICSA’s UIT Committee believe that the biggest obstacle to further growth is the low public profile of UITs, especially with financial advisers. To help address this need, the Committee will develop educational materials explaining how UITs work. They’ll be starting with a UITs 101 webinar, to be hosted by NICSA in December.

Also on the Committee’s agenda:

  • Increasing the amount and quality of publicly-available performance and asset data about UITs.
  • Identifying operational processes that might benefit from increased standardization.

Active participants in the UIT industry may apply to join the Committee, which will meet quarterly. Address inquiries to Bethany Alvare at NICSA.

  • Mike Kochmann

    Excellent summary. Raising the visibility of UITs, particularly with fee-based advisors, will bring energy into an industry that is already growing rapidly. October was the best month in years.

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