Van Kampen Merritt Inc. is launching a tax-exempt unit investment trust designed for tax swapping.
While tax swapping is on the minds of many investors, Van Kampen is believed to be the only mutual fund company right now that is creating a product specifically designed for use in the municipal market. This is the first time since 1988 that Van Kampen has created such a product for municipal bond investors.
The new national unit investment trust will have a discounted price of about $850, with a par value of $1,000 per unit. It will be created by purchasing a pool of insured discount bonds in the secondary market, said Jack Tierney, vice president and product manager for Van Kampen's unit investment trusts.
Van Kampen yesterday started putting out calls to bond desks and unit trust departments at investment banks that sell the company's products, advising them that the new trust was in the works.
This week Van Kampen will begin purchasing securities for the trust, called the Insured Municipals Income Trust Inc.-- Discount Series.
The first trust in the series will be available for sale on about Nov. 17, Tierney said. Approximately three trusts will be created, with a total value of $10 million eaCh. The discounted trust will be offered for sale through the end of this year.
This year's bear market has produced a wave of tax-related selling, in which investors are using their losses to offset capital gains.
In a tax swap, an investor sells a security that has declined in price since it was purchased, and simultaneously purchases another with the proceeds, usually for about the same price. The new security is generally similar to the old one.
The swap allows an investor to book a loss for tax purposes, while continuing to maintain a market position. Investors and mutual fund portfolio mangers also employ swaps to diversify or improve the credit quality of portfolios. In addition, swaps allow investors and fund managers to restructure portfolios to extend or shorten maturity or increase call protection.
"If you believe markets are cyclical, this is probably one of the better opportunities to look at swapping," Tierney said. "Things that were purchased at par less than a year ago are trading in the 80s."
Van Kampen expects that most interest in the trust will come from existing unit investors.
As with an individual bond, though, the trust may become subject to tax liabilities if the prices of the bonds held by the trust increase in value.
Any price gains on the bonds in the trust would be treated as ordinary income at maturity, or possibly as capital gains if the trust is sold before then, Tierney said.
"Unless you sell it at a loss, you will have to deal with the tax consequences," a market source said.
However, the source said, avoiding a tax liability now is "probably worth a lot more than the fact that you're going to have to pay it later when the thing matures."