Swedroe: UIT Managers Exhibit Poor Selection Skill

February 27, 2017

Unit investment trusts (UITs) are SEC-regulated investment vehicles in which a portfolio of securities is selected by a sponsor and deposited into the trust. Although the number of UITs has fallen from approximately 12,000 in 1990 to about 5,000 by the end of 2014, assets held in UITs have grown steadily since the financial crisis, increasing from about $20 billion at the end of 2008 to more than $100 billion by 2015. (These numbers exclude the eight ETFs that are structured as unit investment trusts.)

Unlike mutual funds, equity UITs invest in fixed portfolios of stocks for a predetermined period of time. Generally, equity UITs terminate within two years of their launch date (although some are longer), with many of them terminating at one year. At the end of this specified term, holdings are liquidated and investors receive the proceeds from their investment. A benefit of UITs is that, unlike mutual funds, they don’t have to hold cash to meet redemption needs. The lack of a “cash drag” provides UITs with an advantage. And their lack of turnover keeps total costs down.

Importantly, the fixed portfolio (buy and hold to termination date) of UITs provides a unique sample to specifically measure stock selection skill (isolating it from the other part of active management, market timing).

REIT UITs

Kimberly Luchtenberg, author of the January 2017 paper “REIT Unit Investment Trusts and Fund Manager Skill,” examined the stock selection skills of fund managers using a sample of real estate investment trust (REIT) UITs. As Luchtenberg hypothesizes, a benefit of limiting the study to REIT UITs, instead of the entire UIT universe, is that, because “the REIT population is much smaller than the entire population of stocks, it would be reasonable to suspect that informed managers have the ability to become more skilled at selecting REITs than they are at selecting stocks in general.”

Her study covered the period May 2009 through July 2015 and 37 REIT UITs, each holding 25 REITs using an equal weighting. Because managers must sell assets at the end of the term, and market impact costs can occur, returns nine days from the UIT’s termination date are excluded (of course, investors still must bear those costs, but this is separate from the issue of stock selection skill).

 

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