Have $100,000 you want to invest in tax-exempt unit investment trusts, but you're not ready to put all that money to work at one time?
Even better, have $1 million or $2 million or $5 million you Want to sock away within the next 13 months and watch the income come rolling in?
New pricing features offered by John Nuveen & Co. let investors who commit to investing large sums of cash gain volume discounts on sales charges and commissions without plopping down all the money right away. Pricing options are the latest feature touted by providers of mutual funds and other packaged investment products in the perennial competition to boost sales, which have slipped this year because of volatile market conditions.
Mutual funds, in their spin on the trend, have for years offered investors several classes of fund shares, each with differing payment features -- commonly known as front-end load, back-end load, or level load -- under which an investor would pay on first making the investment, at redemption, or during the life of the investment. Each class of shares also produces a different total return.
But the letter of intent, long a vehicle used by mutual fund companies, gives unit trust investors an opportunity to take advantage of varying market conditions over time, said Ronald E. Toupin Jr., vice president and manager of unit investment trusts at Nuveen.
For example, an investor who signs a letter of intent to invest $100,000 and initially invests only $10,000 would pay a lower sales charge for his incremental purchases, just as if the entire $100,000 had been invested at once, said Toupin, who is the portfolio manager for Nuveen's almost 3,600 outstanding unit investment trusts. Investors must fulfill their pledge within 13 months or they will be assessed a higher sales fee.
Nuveen's trusts have a par value of approximately $17.8 billion.
Nuveen began offering the letter of intent option for unit trust investors in April, the first trust sponsor to do so, according to several industry sources. So far, investors have signed 120 letters of intent, committing to invest more than $17 million under the program. To date those commitments have generated about $10.7 million, Nuveen officials said.
Nuveen also introduced a quick-pay feature in April that enables investors to begin receiving income distributions from their unit investment trusts faster than the traditional 90-day period. The company also lowered the minimum investment on which investors can receive sales charge discounts to $50,000 from $100,000.
Other unit trust sponsors such as Kemper Securities, Van Kampen Merritt, and Nike Securities began offering quick-pay or sales charge discounts aS early as last year, with different payment schemes.
Only one other major unit trust sponsor, Kemper Securities, offers the letter of intent, which it introduced shortly after Nuveen did.
A few other trust sponsors say they are considering adding the feature, but that some brokers have reservations about using it. Critics say that since unit trusts are not always registered under the name of an individual investor, record keeping is a problem for the letter of intent program.
The new pricing options are designed to reintroduce younger brokers and financial planners to unit investment trusts, in hopes that they will pitch the products to clients, Nuveen said.
The pricing options also are designed to whet investors' appetites for unit investment trusts, a product that Nuveen has been offering since 1961.
Although trust sponsors hope that the pricing features will attract new investors, sponsors and brokers say that the traditional unit trust investor profile has not altered radically. Retirement-age individuals in their 50s and older, as well as high net worth investors looking for income, continue to be the predominant buyers of the tax-exempt trusts.
One change, however, is that some parents in their 30s and 40s have begun purchasing the trusts as part of a college savings plan for their children, Nuveen's Toupin said.
Younger investors tend to be more attracted to taxable and equity trusts, which are seeing strong growth, said C. Perry Moore, senior vice president and director of unit investment trusts for Kemper Financial Cos.
While several unit investment trust sponsors say that rising interest rates have helped boost sales, some retail brokers believe demand is still sluggish.
"The best yields are available on unit investment trusts with longer maturities," one broker said. But "people realize they can buy a good bond and get a better return."
Interest in purchasing unit investment trusts has increased because more investors are learning about the advantages of a buy-and-hold investment philosophy, said John Collins, a spokesman for the Investment Company Institute in Washington, D.C.
Unit trust sponsors also are doing a better job of advertising their products. In addition, they are talking up what they say are the advantages of owning a trust versus a mutual fund or a bond: the trusts offer a set basket of securities with a steady, predictable stream of income; liquidity; and low minimum investment costs.
"Unit investment trusts are attractive because they reflect the current market," Toupin said. "You can [get] a higher rate of return today than you can get with a similar quality mutual fund or closed-end fund."
Despite the marketing lift, trust sales have faltered this year compared with last year, as market volatility and gyrating interest rates have made investors skittish, Collins said.
During the first half of 1994, 402 tax-exempt trusts were created with a total dollar value of $2.1 billion, according to the Investment Company Institute. That compares with 447 municipal trusts created in the same period last year with a dollar value of $2.5 billion.
However, tax-exempt unit investment trusts still constitute the largest type of trusts, according to the Investment Company Institute. The 402 tax-exempt trusts made up 86% of the 467 trusts that had been created this year through June 30. The value of the tax-exempt trusts was approximately 42% of the value of all trusts, which was $4.9 billion. The institute figures are based on information provided by 17 unit investment trust sponsors.
At the end of 1993, 13,740 unit trusts with a value of $87.6 billion were outstanding. This included 12,803 municipal trusts with a market value of $70.5 billion, the Investment Company Institute said.
Approximately 85% of the municipal trusts created during the first half of 1994 were long-intermediate or long-term trusts with an average maturity of 15 years or more, Investment Company Institute figures show. However, in both 1993 and 1994 new single-state trusts outnumbered national trusts by a ratio of at least 3 to 1, the Institute said.
During the year's first half, tax-exempt unit trust sales slipped about 25% from the same period last year at Nike Securities, which offers the First Trust products, said Andy Roggensack, senior vice president and eastern regional sales manager at the firm. But sales have begun picking up since then, Roggensack said.
"It's due to uncertainty about the direction of rates," Roggensack said.
Toupin at Nuveen says that sales of the firm's unit investment trusts climbed about 20% during the second quarter. National trusts with a five-year and 10-year average life have been most popular, Toupin said.
Other trust sponsors have reported sales declines during the first half of the year similar to those at Nike, but are forecasting a rebound if interest rates stabilize.