Unit investment trusts (UITs) were made for investors who like to buy and hold. Managers of mutual funds may be trading constantly to maximize returns. But with an equity unit investment trust, you get a fixed portfolio of stocks that lasts 1 to 30 years. The UIT stocks just sit there, unmanaged, for the term of the trust. If a stock is ailing, it can be sold, but it commonly isn't replaced. The bottom line is you're betting on the prescience of stock pickers to assemble a winning package at the start.
Sounds kind of risky. What if several stocks sour? Or what if the stocks are doing well when the trust dissolves, making it a bad time to sell? Do you save enough in management fees to fare better than with a mutual fund?
Many pros say equity UITs, offered by most brokerage houses, are impractical and expensive. "It seems more like a marketing gimmick than a sound financial idea," says John Markese, head of the American Association of Individual Investors. Says Linda Lubitz, a financial analyst in Coral Gables, Fla.: "Buying an unmanaged basket of assets doesn't really add any value." And though you don't pay for management, sales fees can be steep. UITs charge 1% to 5% up front, and a supervisory fee of $1.50 to $1.75 per $1,000 per month. That's equivalent to mutual funds with loads, not no-load funds. Some UITs require you to pay a sales charge again if the trust expires and you roll over money into a new trust.
With so many strikes against equity UITs, it's not surprising that money is flooding into mutual funds rather than these trusts. Nonetheless, even though the majority of UITs just hold bonds, major brokerages insist equity UITs have their place. They say the trusts give you instant and affordable diversification, usually for a minimum investment of $1,000--but as little as $250 for individual retirement accounts. And they point out that you can sell your trust at any time for the current market value of the stocks. Some trusts even claim to offer a guaranteed return by combining stocks with safe government bonds.
Moreover, they say, with a UIT, unlike a mutual fund, you know exactly what stocks you own at any time. Because what you see is what you get, "if you think the stocks are going bad, you can decide to get out," says Robert Holly, director of unit trusts at PaineWebber.
One form of an equity UIT mimics stock market indexes. Advocates say these UITs are a good investment vehicle because they rise and fall with the index and don't need to be managed. For example, Merrill Lynch's Select 10 Portfolio holds the 10 stocks from the Dow Jones industrial average yielding the highest dividends. But it has reaped a total return of 20.9% from May, 1991, when it was launched, to May, 1993, while the Dow has risen 22.9%. And its 1% load plus a small ongoing charge of $1.50 a month per $1,000 look pricey compared with an average annual expense ratio of less than 1% for index mutual funds.
Equity UITs can get even more expensive when brokers pseudomanage them by limiting their term to one year, then reconstituting them with new stocks. Take Lehman Brothers' Ten Uncommon Values, which holds 10 undervalued stocks expected to outperform their sectors. This year's picks include Amerada Hess, General Motors, and Citicorp. Next June, the UIT will dissolve and be remade with the analysts' new picks. At that point, you cash out or roll over your units. But rolling over can be costly: You pay the 4% sales charge for Uncommon Values each time. Also, for the past three years, you would have barely outperformed the Standard & Poor's 500-stock index.
HEDGES. You can also find equity trusts invested in stable stock groups, such as utility and telephone companies, that act like bonds, paying big dividends and growing slowly. Yet other trusts hedge on stock volatility by including bonds in the mix. Prudential's Government Securities Equity Trust divides its holdings between Treasury zero-coupon bonds and shares in a stock fund. Units cost $15 each, but the zeros mature at $20 in 14 years, so you're guaranteed a $5-per-share profit when the trust dissolves. "Half your money is in secure products, the rest is in quality, long-term stocks," says Bill Hustus, UIT marketing manager at Prudential.
Of course, you could buy the Treasuries yourself and put the rest in a no-load mutual fund, saving on UIT fees. Another problem: Unlike mutual funds, UITs aren't tracked and ranked, making them hard to evaluate. With stock UITs, what you see may be what you get, but if you add it all up, the picture is far from clear.