The genius of Wall Street has never been more evident than in the way the municipal boys have been able to market their products through open-ended mutual funds, and through unit investment trusts (UITs).
This may be especially appreciated when one considers the growth of the tax-exempt market. In 1980, the total volume of all new long-term municipal bonds was $46.9 billion. By 1984, the volume was $93.3 billion, almost double the 1980 output.
UITs have grown in use and popularity over the past five years. In order to offer a product with a high tax-exempt return, the sponsor-underwriters of UITs usually package long -- 20- or 30-year bonds with triple-A credit ratings. Since these are generally the longest bonds of a new issue, they offer the highest yields.
As a result, the UITs are able to offer customers above average returns in a diversified portfolio of bonds. A trust is formed, for example valued at $10 million, and 10,000 units are offered at about $1,000 per unit plus accrued interest. There is a sales load of about 4.9 percent, with the salesman getting about 3.2 percent and the sponsor 1.7 percent.
But it is the high yield and diversification that makes the UITs attractive. John Nuveen & Co., a purveyor of both UITs and open-ended mutual funds, recently offered a return of 7.71 percent on its open-ended funds, while their nationwide UIT returned 9.34 percent. But the management of these trusts is mostly passive and two years ago, the Washington Public Power Supply System Projects' Nos. 4 and 5 went bankrupt and upset many investors. The UIT managers were able to turn this disastrous event to their benefit.
Insured bonds and insured portfolios have been growing as more and more new types of municipal bonds were crowding out the traditional general obligation and revenue bonds. Underwriters began insuring bonds for added protection and to make these new unknown types of issues more saleable. In 1980, the total UIT market place activity was $4 billion, of which 14 percent of the UITs were insured. In 1984, paralleling the growth in the new issue market, $14.6 billion of new UITs were sold, with 43 percent being insured for added investor protection.
As far as yield differentials go, Nuveen has an uninsured New York state UIT that returns 9 percent, and an MBIA insured AAA-rated New York UIT that returns 8 3/4 percent.
The firm of Van Kampen Merritt Inc., is the nation's leading sponsor of insured UITs, using AMBAC insurance, which carries a triple-A rating by Standard and Poor's. Van Kampen has also sponsored both insured and uninsured state UIT's. Among the states whose UITs are insured, are Pennsylvania, California, New York, Ohio, New Jersey, and Michigan.
John Nuveen uses MBIA insurance, which is rated triple-A by both Moody's and S&P's, and where they have an insured state UIT outstanding, they also have an uninsured UIT of the same state. Right now Nuveen's insured states are Pennsylvania, Massachusetts, and New York. Recently, Nuveen brought out an uninsured Maryland UIT which returned 8.75 percent and a Virginia UIT which returned 8.80 percent.
Most of these sponsor-underwriters wholesale their products through brokerage houses and now even through banks. Tom Littauer of Van Kampen noted that the uninsured trusts by major sponsors all use A or better rated bonds. All of the insured trusts carry a AAA rating. Many brokerage houses market their own types of UITs as well.
The Treasury will offer a two-year note on Wednesday in minimums of $5,000. They should return 9.75 percent.