A unit investment trust, like its investment company brethren, buys and holds a portfolio of stocks, bonds or other securities. Bond investors in particular may be interested in UITs, but many advisors overlook them. A Chicago-based firm wants to make UITs more accessible to advisors and their clients.
UIT Investing, a Chicago-based firm co-founded in 2017 by brothers Randy and Paul Watts, last week launched what it called the first dedicated unit investment trust (UIT) research platform designed for advisors and the public.
When this reporter admitted in an interview with the brothers that he knew far less about UITs than mutual funds, ETFs and closed-end funds, and that perhaps many advisors also were less than informed about UITs and their place in client portfolios, UIT Investing CEO Randy Watts agreed, saying, “You hit the nail on the head.”
While UITs existed before ETFs and closed-end funds and are one of the four types of U.S.-Registered Investment Companies (RICs), “nobody knows much about them because of the lack of data and analytics,” said Watts. “That’s one of the problems we’re hoping to solve” with UIT Investing’s offering, arguing that much of the growth among ETFs and closed-end funds came from the amount of data available to advisors and end-investors.
Investment Company Institute data shows that the UIT universe is relatively small; there were 5,035 trusts in the U.S. with a value of $84.94 billion as of year-end 2017. By contrast, ICI reported that there were 1,856 ETFs with assets of $3.47 trillion as of January 2018; for mutual funds, as of the same date ICI said there were 7,988 mutual funds with net assets of $19.32 trillion. ICI’s latest data (as of June 2017) showed there were 533 closed end funds with assets of $271 billion.
With his experience launching new UIT series and building UIT infrastructures at firms like Van Kampen, Nuveen and InCapital, Randy Watts says with authority that “Investments are driven by research,” and he believes that providing the UIT research in an easy-to-use, affordable online format will help “grow the structure” and UIT investments among advisors.
The majority of UIT usage has traditionally come from commission-based advisors in the wirehouse and regional broker-dealer channels, but Watts notes that “we’re slowly seeing a shift to the advisory channel; that’s where the market is going.” Specifically, that growth is in wrap programs and rep-as-portfolio accounts, says Watts, to the point that usage is now “50% wrap; 50% wirehouse.”
How Do UITs Work?
Unlike a mutual fund or ETF, a UIT is closed-ended — stocks and bonds within the fund are not typically not traded, and the UIT has a maturity date, at which point its assets are distributed among investors. While there are stock and bond UITs, stock investors often prefer mutual funds or ETFs.
Are UITs a Good Investment?
What are the benefits of UITs to end investors? Randy Watts says the “the number 1 benefit” is the transparency of the UIT. “Every investor knows exactly what they own in the UIT,” when a UIT is launched, and the holdings don’t change until the trust reaches maturity (there are some exceptions to that rule, such as when a company in the trust goes bankrupt).
The second benefit is lower fees. Since UIT investors don’t pay a management fee, “especially over the longer-term that can make a difference” in the trust’s returns.
A third benefit is that the structure of a UIT allows it to be “very focused and narrow.” The example Watts uses is the “Dogs of the Dow,” the 10 highest-yielding stocks among the Dow Jones Industrials. Most mutual funds, by contrast, have many more holdings in their funds.
Finally, UITs can be used as income vehicles. One of the nice things about UITs, Watts says, is that “you can predict what your income is going to be,” especially with equity UITs, which account for the great majority of the trusts.
The UIT Platform
The UIT Investing platform features a two-tiered subscription model: one free, the other paid.
The free offering allows advisors or end investors to perform general searches on the UIT universe to find trusts that fit into a specific asset class, goal or strategy
The paid version costs $25/month/per user, though there is also enterprise-level pricing which would allow, for example, a given broker-dealer to provide access to the research for all their reps.
Once an advisor finds all the UITs that meet the desired asset class or strategy, the paid version allows that advisor, Watts says, to “pull reports on 5-10 UITs “ to compare and contrast those UITs by metrics like performance over time, risk levels and fees to determine which is the most appropriate UIT for an end client (or to compare the UIT with other investing vehicles).
The primary user, says Watts, is an advisor that is using UITs now but “doesn’t have access to the data and analytics to know what’s the best strategy to use for their clients” considering performance, risk, suitability standards and increasingly fiduciary standards. “The availability of that kind of analysis for other products is readily available. It’s at their fingertips for mutual funds and ETFs; for UITs it’s not.”
Is UIT Investing competing with wirehouses and other broker-dealers who might have their own UIT research capabilities? No, says Watts. Broker-dealers are looking for specific third-party research that’s accurate and delivered by an independent organization that knows the UIT space well, “allowing the research unit at a broker-dealer to make recommendations. It’s a complement to what they’re doing.”
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