SUPERCHARGED UIT's

For quite some time companies like Nuveen, Ransome, and Van Kampen had a number of fixed income UIT’s as well as the popular REIT’s (Real Estate Investment Trusts) but they all took a back seat in the late 90’s with the proliferation of defined equity portfolios, particularly those focused on the internet.

So, what is a UIT? A UIT is a registered trust in which a fixed portfolio of securities is purchased and held to maturity, usually in the 5-7 yr range for those bearing equity portfolios. Unlike the income portfolios, this new brand of trusts relied solely on capital appreciation of stocks to make money. The more conservative of these were the Diamonds (portfolio of 30 stocks representing the Dow Jones index) and the Spiders (A portfolio representing a fraction of the S&P 500), while the most volatile of these held ten internet stocks.

A Unit Investment Trust (UIT) is not an actively managed portfolio. Because you do not have a manager making trades you don’t have some of the fees found in a mutual fund. The equity UIT’s had a fairly steep sales load, up to 4% which took a healthy bite out of your initial investment, unlike a mutual fund, this fee had to be made up rather quickly. Most UIT’s had a maturity date of 5 years.

Each unit typically costs a thousand dollars, and the NAV will begin at ten dollars a share. At this time one had to go through a brokerage and a stockbroker, or financial advisor in order to purchase the UIT. They were then held electronically in your brokerage account. They can be purchased in an IRA as well as your taxable account. They can also be bought and sold on the secondary market.

The size and number of holdings alone distinguish these investment vehicles from their cousins, the mutual fund. While it is common for a mutual fund to have two hundred different securities, a UIT will have a mere ten to thirty holdings; ten being the most common. Therein lays the secret to their success. So how does that work?

If you’ve got a Tech heavy mutual fund you are going to have at least a hundred securities, and not all are tech stocks. In fact you will likely see some cash as well as some income stocks to give the portfolio a little bit of balance. While this may protect you a little on the down side, those income producing stocks and cash will weigh you down in a rapidly rising market. When your internet stocks are flying high, your returns are balanced by the losers you inevitably have in your fund portfolio; no such problem for the UIT.

It’s a little bit like playing roulette. Owning a mutual fund is like putting your chips on selected numbers, then also betting on black or white. Even if your number doesn’t come up you do can win some by betting on black or white, odd or even, or by also picking a half dozen numbers. Your odds of winning are much greater, but your winnings are lessened due to spreading out your chips. Conversely an internet UIT puts all of its chips on red number 7. You see where I am heading with this…

On the other hand, your Internet UIT will have a VERY focused portfolio of ten internet stocks and nothing more; no cash, no income stocks, no bonds. Suddenly you have a portfolio that is focused on the most volatile sector of the market, and in a very short time those portfolios doubled themselves several times. I can remember one client of mine who began with 500k in mid 1998 in his IRA and by the time we rang in the New Year he was sitting pretty at one point four million. The only reason he did not crack two million was that only half of his portfolio was in UIT’s.

Because you are so narrowly focused on the internet, when things turn sour as they did in March of 2000, your account fell from the precipice void of a parachute. Had there been a few income stocks and cash in the portfolio the fall would not have been so painful.

Mutual funds fared better here. Even though most fund managers failed to realize the damage coming down the pipe in March, their habit of balancing even the most volatile portfolio was their saving grace; to a certain extent. The reality of it was, we all got blind -sided, professionals and laymen alike.

If I have not caused you to shy away from this type of investment why not go to www.vankampen.com and get more information, and if it looks right to you, open and account and purchase a trust.

Good Luck and Happy Investing.