Sometimes, the name of a product is more interesting than the product itself.
Last week, I noticed a magazine ad for something called a "Defined Asset Fund," offered by the four-firm band of
Salomon Smith Barney
Morgan Stanley Dean Witter
This ad was completely empty of any hard information, but full of thematic marketing babble. "Adding Defined Asset Funds to your investment portfolio is like adding more instruments to an orchestra," the ad read.
I'd never heard this term before. As painful as it was, I read the short ad again and again, looking for clues. For the life of me, I couldn't figure out what these things were. They were funds, but not mutual funds? Closed-end funds, maybe?
I finally picked up the phone and called the number listed in the ad. It was a number to order literature on the products, but I asked the woman who answered the phone what these products were. She said they were like mutual funds.
It turns out these aren't new products at all. They've been around for decades and are called
unit investment trusts
Now that's a term I understand. A term that's in the vocabulary of most seasoned investors. A term that's been defined numerous times in this column.
A unit investment trust, or UIT, is an unmanaged or fixed portfolio of securities with a finite life and predetermined expiration date. UITs started out investing primarily in municipal bonds. But during the 1990s, equity UITs have become extremely popular, investing in sectors like the Internet and strategies such as the
Dogs of the Dow
(the highest-yielding of the 30
Sold mostly by brokers, UITs can carry hefty sales charges. But they can have some advantages over mutual funds. For one, an investor knows exactly what stocks are in the portfolio, from start to finish. No danger of style drift here. Two, these fixed portfolios don't generate any capital gains distributions during their lives because there is no active trading of securities in the portfolio. So, sales charge aside, they can be cheaper to own.
Still, I wanted to know why some UITs are called Defined Asset Funds.
The answer, in a word: marketing.
Indeed, Defined Asset Funds were called unit investment trusts long before Merrill Lynch and its three partners cooked up the new name.
The change is meant "to better explain what the product is," says Donna Nardozza, a marketing specialist for the Defined Asset Funds at Merrill Lynch. "We found that most investors don't know what UITs are."
With a name like unit investment trust, "you might think it is a bank product," Nardozza adds. "We're starting with a more positive definition of the investment."
Since UITs are fixed baskets of securities, I guess "defined" is a good word. But the old, awkward appellation was fine for a good 30 years. Unit investments trusts were written into the
Investment Company Act of 1940
and started making more frequent appearances in the early 1960s.
Merrill Lynch and its three partners renamed their UITs Defined Asset Funds in the early 1990s. Chicago-based
, one of the biggest UIT sponsors, started calling its UITs defined portfolios in June 1998.
Confusing matters even further,
Van Kampen Funds
, another big sponsor, calls its UITs "Focus Portfolios." (Thankfully, both Nuveen and Van Kampen also identify the products as UITs on their respective Web sites.)
UITs, Defined Asset Funds, defined portfolios -- whatever you want to call them -- have become pretty popular. This year, for example, equity UITs have taken in $47.7 billion through August, according to the
Investment Company Institute
. In 1998, equity UITs took in $42.5 billion over the same period on their way to a record $60.1 billion intake for the year.
You shouldn't be surprised by the UIT's new aliases. Wall Street has always been able to come up with some winning euphemisms. Back in the 1980s, tax-sheltered limited partnerships that were improperly sold to unsuspecting retail investors were called "direct investments." Junk bonds are called high-yield debt. One type of junk used to be called the fallen-angel bond.
Nevertheless, any change in name after decades of use will result in confusion.
I called up one longtime broker and him if he sells a lot of defined portfolios.
His response: "Huh?"
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