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- 1. UITs Equity Investing With Unit Investment Trusts First Last, Title Company Name You should consider a trust’s investment objective, risks, and charges and expenses carefully before investing. Contact your financial advisor or call First Trust Portfolios L.P. at 1-800-621-1675 to request a prospectus, which contains this and other information about a trust. Read it carefully before you invest. Not FDIC Insured • Not Bank Guaranteed • May Lose Value Not a Deposit • Not Insured By Any Federal Government Agency First Trust Portfolios L.P. • Member SIPC • Member FINRA
- 2. UIT Comparison The portfolios presented in this seminar are offered as UITs. UITs have many unique characteristics. Below is a comparison of UITs to Mutual Funds and Individual Securities. Individual Securities Mutual Funds UITs Fully invested l l Known portfolio l l Daily liquidity l l 1l1 Convenience l l Professional selection l l l l Reinvestment options 2l2 l Managed portfolio l Supervised portfolio Sales Charges, fees, and/or expenses3 l l l Risks4 l l l 1Units may be redeemed on any business day at the redemption price which may be more or less than the original purchase price. available for companies with dividend reinvestment plans. 3There are costs associated with an investment in each type of security. Consult your brokerage firm and/or the security’s prospectus (if applicable) for complete details. 4Investing involves risk, including possible loss of principal. Please see Risk Considerations in the prospectus for risks specific to the unit investment trusts mentioned in this presentation. 2Only Equity Investing with UITs
- 3. Risk Considerations There is no assurance an unmanaged unit investment trust will achieve its investment objective(s). An investment in a unit investment trust is subject to market risk. Market risk is the risk that a particular security owned by a trust may fall in value. Trusts which invest in common stocks are subject to certain risks, including the risk that the financial condition of the issuers of the stocks or the general condition of the stock market may worsen. Trusts which invest in foreign securities are subject to certain risks, including currency fluctuations, political risks, withholding, the lack of adequate financial information, and exchange control restrictions impacting foreign issuers. Risks associated with investing in foreign securities may be more pronounced in emerging markets. Trusts which are concentrated in individual sectors or industries are subject to additional risks, including limited diversification. Trusts which invest in small–cap companies are subject to certain risks, as the share prices of small-cap companies are often more volatile than those of larger companies due to several factors, including limited trading volumes, products, financial resources, management inexperience and less publicly available information. Short term strategy trusts should be considered as part of a long-term investment plan and you should consider your ability to pursue investing in successive portfolios, if available. Equity Investing with UITs
- 4. Why Invest? Grow Wealth Over Time Examples of Financial Goals College Tuition Buy a House Retirement Equity Investing with UITs
- 5. The Effect of Inflation As inflation rises, your dollar is worth less. Housing College Tuition & Fees Medical Care 94% 336% 214% % change 1988-2012 (25 years) Source: U.S. Department of Labor Bureau of Labor Statistics Equity Investing with UITs
- 6. Perspective: Value of $1 invested from 1926 - 2012 Small Company Stocks Ending Wealth Avg. Annual Total Return Large Company Stocks $18,365 11.9% $3,525 9.8% $100 $123 5.7% $10 $21 $13 3.5% 3.0% $100,000 $10,000 Government Bonds Treasury Bills Inflation $1,000 Dec-12 Dec-09 Dec-06 Dec-03 Dec-00 Dec-97 Dec-94 Dec-91 Dec-88 Dec-85 Dec-82 Dec-79 Dec-76 Dec-73 Dec-70 Dec-67 Dec-64 Dec-61 Dec-58 Dec-55 Dec-52 Dec-49 Dec-46 Dec-43 Dec-40 Dec-37 Dec-34 Dec-31 Dec-28 Dec-25 $1 $0 For illustrative purposes only and not indicative of any investment. The data assumes reinvestment of all income and does not account for taxes or transaction costs. The timely payment of principal and interest of government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government. Bonds are typically intended to provide income and/or diversification. U.S. government bonds may be exempt from state taxes and income is taxed as ordinary income in the year received. Stocks are not guaranteed and have been more volatile than the other asset classes. Small company stocks are more volatile than large company stocks and are subject to significant price fluctuations. An investment cannot be made directly in an index. Past performance is no guarantee of future results. Small Company Stocks—represented by the fifth market capitalization quintile of stocks on the NYSE for 1926-1981 and the performance of the Dimensional Fund Advisors, U.S. Micro Cap Portfolio thereafter; Large Company Stocks—Standard & Poor’s 500, which is an unmanaged group of securities and considered to be representative of the stock market in general; Government Bonds—20-year U.S. Government Bond; Treasury Bills—30day U.S. Treasury Bill; Inflation—Consumer Price Index. Equity Investing with UITs
- 7. S&P 500 Index 1926 - 2012 Average Annual Total Return: 9.8% Start of ―Great Recession‖ ―Black Monday‖ Stock Market Crash of 1987 $10,000 Watergate Scandal 9/11 Terrorist Attacks on U.S. WTC Bombing $3,525 Cuban Missile Crisis $1,000 JFK Assassination $100 Korean War Began Stock Market Crash of 1929 $10 Pearl Harbor Dec-12 Dec-09 Dec-06 Dec-03 Dec-00 Dec-97 Dec-94 Dec-91 Dec-88 Dec-85 Dec-82 Dec-79 Dec-76 Dec-73 Dec-70 Dec-67 Dec-64 Dec-61 Dec-58 Dec-55 Dec-52 Dec-49 Dec-46 Dec-43 Dec-40 Dec-37 Dec-34 Dec-31 Dec-28 $0 Dec-25 $1 For illustrative purposes only and not indicative of any investment. The data assumes reinvestment of all income and does not account for taxes or transaction costs. Stocks are not guaranteed and have been more volatile than the other asset classes. An investment cannot be made directly in an index. Past performance is no guarantee of future results. Large Company Stocks—Standard & Poor’s 500, which is an unmanaged group of securities and considered to be representative of the stock market in general. Equity Investing with UITs
- 8. What’s Your Strategy? Chance or Discipline Classic Investor Mistakes Resist Self-Defeating Behavior Chasing Returns Investors tend to jump on the bandwagon when securities are doing well. Employ Discipline Removes the emotional factor from the decision making process. Doing Nothing Hunkering down and refusing to make portfolio changes may drag performance results. Rebalance Rebalancing ―forces‖ you to periodically ―sell high and buy low.‖ Going to Cash You don’t want to be sitting in cash when the rebound begins. Invest for the Long Term Investors should consider investing for at least 3 to 5 years. Equity Investing with UITs
- 9. Success Strategies Diversification Periodically Rebalance Asset Allocation Invest for the Long-Term Equity Investing with UITs
- 10. Why Diversify? Source: Ibbotson Associates. Small stocks are represented by the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio; large stocks by the Standard & Poor’s 500 Index, which is an unmanaged group of securities and considered to be representative of the U.S. stock market in general; government bonds by the 20-year U.S. government bond; Treasury bills by the 30-day U.S. Treasury bill; and international stocks by the MSCI EAFE Index, which is representative of the equity performance of developed markets outside of North America: Europe, Australasia and the Far East. This chart is for illustrative purposes only and not indicative of any actual investment. An investment cannot be made directly in an index. Past performance is no guarantee of future results. The data assumes reinvestment of all income and does not account for taxes or transaction costs. Equity Investing with UITs
- 11. Risk and Return The Relationship Between Risk and Return of Stocks & Bonds (1983 – 2012) Source: Bloomberg, Barclays Capital. Stocks-Standard & Poor’s 500 Index, which is an unmanaged group of securities and considered to be representative of the U.S. stock market in general; BondsBarclays Capital U.S. Aggregate Index covers the US dollardenominated, investmentgrade, fixed-rate, taxable bond market of SEC-registered securities. An investment cannot be made directly in an index. Past performance is no guarantee of future results. The data assumes reinvestment of all income and does not account for taxes or transaction costs. Equity Investing with UITs
- 12. Importance of a Long-Term Perspective 10-Year Moving Average of U.S. Large-Cap Common Stock Nominal Total Returns (1825 – 2012) 25% 20% 15% 10% 2002 1996 1990 1984 1978 1972 1966 1960 1954 1948 1942 1936 1930 1924 1918 1912 1906 1900 1894 1888 1882 1876 1870 1864 1858 1852 1846 1840 -5% 1834 0% 2008 2012 5% Data Source: Prior to 1926 ―A New Historical Database for the NYSE 1815 to 1925: Performance and Predictability "William N.Goetzmann, Roger G. Ibbotson, Liang Peng, Yale School of Management, which was based on monthly stock prices plus dividends of more than 600 NYSE stocks. From 1926 to present, Ibbotson Associates Large Company Stocks which consists of the Standard & Poor’s 500 Index. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. The index cannot be purchased directly by investors. Historical performance figures for U.S. large-cap stocks are for illustrative purposes only. Returns are not intended to imply or guarantee future performance. These returns were the result of certain market factors and events which may not be repeated in the future. Equity Investing with UITs
- 13. Rebalancing: 50/50 Stock/Bond Allocation Example Year-End Stock Allocation of a Non-Rebalanced Portfolio Source: Bloomberg and Barclays Capital as of 12/31/12. Past performance is no guarantee of future results. Compound returns, standard deviation, and Sharpe ratios are all annualized. Stocks are represented by the Standard & Poor’s 500 Index, which is an unmanaged group of securities and considered to be representative of the U.S. stock market in general; Bonds are represented by Barclays Capital U.S. Aggregate Index which covers the US dollardenominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs. Standard Deviation is a measure of price variability (risk). Sharpe Ratio is a measure of excess reward per unit of volatility. Hypothetical Performance of a Rebalanced vs. Non-Rebalanced Portfolio – 1993 to 2012 Rebalanced Non- Rebalanced Growth of $100,000 $446,394 $413,323 20-Yr Avg. Annual Return 7.77% 7.35% 20-Yr Standard Deviation 7.70% 9.21% Sharpe Ratio 0.53 0.41 The example is for illustrative purposes only and is not indicative of the future performance of any of any First Trust unit investment trust. Equity Investing with UITs
- 14. Rebalancing Basics A loss of 50% requires a gain of 100% to break even. Portfolio transactions may lead to more costs incurred. Consider tax implications. Equity Investing with UITs
- 15. Knowledge Into Practice Unit Investment Trusts (UITs) A UIT is a pooled investment vehicle in which professionally-selected securities are deposited into the trust. Equity Investing with UITs
- 16. What is a UIT? Sponsor – the company that creates the trust Unit – represents an undivided ownership interest in the assets contained in the trust Unit holder – an investor in the trust Equity Investing with UITs
- 17. History Major growth in the Unit Investment Trust (UIT) industry began in the 1970s. Began primarily as fixed income bond trusts and have expanded to all areas of the investment world. $550+ billion in new UIT deposits since 1990* *Source: Investment Company Institute Equity Investing with UITs
- 18. Trends in UIT Issuance Total Deposits by Type 2012 1990 7% 10% 93% Equity 90% Debt Source: 2009 Investment Company Fact Book; Investment Company Institute Source: Investment Company Institute Equity Investing with UITs
- 19. A “Buy and Hold” Investment Staying invested vs. market timing Helps to eliminate emotional investing Requires patience and discipline Equity Investing with UITs
- 20. Buy and Sell vs. Buy and Hold Annualized Returns (1992-2011) “The investor’s 9.00% 7.8% 8.00% chief problem – 7.00% and even his worst 6.00% enemy – is likely to be himself” -Benjamin Graham 5.00% 4.00% 3.5% 3.00% 2.00% 1.00% 0.00% Average Equity Fund Investor S&P 500 Index Source: DALBAR, Inc. Quantitative Analysis of Investor Behavior, 2012 The S&P 500 Index is an unmanaged group of stocks and considered to be representative of the U.S. stock market in general. An investment cannot be made directly in an index. Past performance is no guarantee of future results. Equity Investing with UITs
- 21. Buy and Hold – Not Buy and Ignore $ Proceeds in Cash Rollover Proceeds (Rebalance) In-kind Distribution Equity Investing with UITs
- 22. Nuts and Bolts Diversification Asset Allocation Buy and Hold Rollover feature to facilitate Rebalancing Equity Investing with UITs
Notas do Editor
- In today’s presentation we will discuss strategies of successful investors and how to invest in equities using unit investment trusts (UITs).
- There are important risks to consider when investing in equity UITs. In addition to being invested in stocks, which involves the risk of loss of principal, a trust may be concentrated in stocks in an individual sector or industry making it subject to additional risks, including limited diversification. Trusts which invest in foreign securities are subject to certain risks, including currency fluctuations, political risks, the lack of adequate financial information, and exchange control restrictions impacting foreign issuers. These risks may be more pronounced in emerging markets.Trusts which invest in small–cap companies are subject to certain risks, as the share prices of small-cap companies are often more volatile than those of larger companies due to several factors, including limited trading volumes, products, financial resources, management inexperience and less publicly available information.Some trusts may follow a short-term strategy. These trusts should be considered as part of a long-term investment plan and you should consider your ability to pursue investing in successive portfolios, if available.
- Before we talk about investing, let’s talk about why you invest. Most people have a long list of financial goals. The ultimate goal is to grow wealth over time. Investing may help families to reach goals such as paying for the rising cost of college education, or buying their first home, or being comfortable in retirement. To attain those goals, it’s important to choose investments that have the potential to stay ahead of taxes and inflation.
- History has shown that major historical events can impact stock market returns. But if you look at the bigger picture, you can see that the long-term trend for stocks is positive. This chart shows large company stocks as measured by the S&P 500 Indexfrom 1926 to 2012. You can see that despite war, recession, major stock market crashes, and political uncertainty, stocks have appreciated over time.While history has shown that market downturns are a normal occurrence and that patient investors have been rewarded over the long-term, it is important to use the past only as a point of reference to help keep market volatility in perspective.
- “Buy low, sell high.” That’s one of the first principles of investing. And it’s a lot easier said than done. Let’s face it – nobody really knows when stocks are at their low or high. But there are some things you can do to improve your chances for better results. First let’s talk about what not to do. One classic investor mistake is trying to time the market. It is a risky proposition and history has shownthat stocks are prone to sudden declines in value.Investors tend to jump on the bandwagon when securities are doing well and get out when they are going down. That develops a pattern of buying high and selling low, which is exactly opposite of what you need to do to be successful. How can you avoid making emotional decisions when your hard-earned money is at risk? It’s virtually impossible to predict market declines or recoveries with certainty, so we believe a better approach is to employ discipline. Taking a disciplined approach to investing may help to remove emotional factors from the decision making process of when to buy and when to sell. Another classic investor mistake is to simply do nothing. Hunkering down and refusing to make portfolio changes can have dramatic results on your portfolio. But if you make rebalancing part of your investment approach, you are forced to periodically to sell high and buy low.And going completely to cash can be another mistake. Some investors simply choose to wait it out on the sidelines but market recoveries can happen quickly and those investors will not be in the market when a rebound occurs. We believe successful investors establish a long term plan and stick with it in good times and in bad. We believe over the long term, a company’s fundamentals determine its value. In the short term, a stock’s price can fluctuate widely in response to outside factors such as what is happening in the world at any given time. We believe you have a far greater potential to achieve your financial goals if you employ discipline, periodically rebalance and take a long-term investing approach.
- The market will always have ups and downs. It’s tough to know when it’s the ideal time to get in or get out. We can’t completely eliminate the risks, but there are some steps you can take to help to smooth out market volatility over time. So now let’s talk about practices we believe you should implement when investing. You’ve heard the expression, “Don’t put all of your eggs into one basket.” It is critical when investing to spread the risk over a variety of securities. You can diversify among different stocks in the same sector or among stocks in different asset classes.There is a difference between diversification and asset allocation. Diversification can be done with any random asset or investment without thought to its interaction with other investments and needs of the investor. Asset allocation, takes into account an investors’ specific characteristics to help find the right kinds of investments with which to diversify. While returns can fluctuate widely over shorter periods of time they tend to be less volatile over longer time periods.Your asset allocation, over time, can change so it is important to periodically rebalance the portfolio to ensure that your allocations are still in line with your goals.
- Let’s talk about the first one. Why Diversify? Diversification is important because it makes your portfolio less dependent on the performance of any single investment or asset class. This chart illustrates the annual performance of various asset classes in relation to one another over the past 20 years as well as a diversified portfolio consisting of an equally-weighted combination of the asset classes. As you can see, the performance of any given asset class can have drastic changes from year to year making it nearly impossible, even for the most astute investors, to accurately predict the best combination of asset classes to maximize returns and minimize risk. It is important to keep in mind that diversification does not guarantee a profit or protect against loss.
- This chart shows the relationship between risk and return of stocks and bonds. As risk increases in an investment portfolio so do the return expectations. Investors can manage risk tolerance through asset allocation and by selecting investments that meet their risk/return expectations. Effective asset allocation requires combining assets with low correlations—that is, those that have performed differently over varying market conditions.Investing in assets with low to negative correlation can reduce the overall volatility and risk within your portfolio and may also help to improve portfolio performance. The chart illustrates the effects of low correlation on the risk and return of varying combinations of stocks and bonds. Return is measured by average annual total return, and risk is measured by standard deviation, for the 30 year period from 1983 to 2012. Standard deviation is a measure of price variability. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns.
- Volatility has always been and will always be a part of investing. No one can predict with any certainty which way the market will go or how long a market downturn will last. But, history has shown that U.S. large-cap stocks have rebounded from every market downturn over time. It remains as true today as it has over the years that market volatility is a reminder that it is important to keep a long-term perspective when investing.The importance of a long-term approach is evident in the chart shown below which illustrates the 10-year moving average of U.S. large-cap common stock nominal total returns from 1825 through 2012. Much like the economy, the market tends to move in cycles. We believe in the resiliency of the U.S. stock markets and believe that investors who remain committed to their long-term investment plan will continue to be rewarded over time.
- These charts illustrate the importance of rebalancing. Experienced investors typically do not proactively change their asset allocation based on the relative performance of asset categories – for example, increasing the equity allocation when the stock market is on the rise. However, because different asset classes almost never go up or down at the same rate, every allocation mix tends to get out of balance over time. That’s when it’s time to “rebalance” the portfolio. Consider the examples shown here which illustrate the hypothetical performance of two $100,000 portfolios, each with an allocation of 50% stocks and 50% bonds invested from 1993 through 2012, an especially volatile time in the markets. One portfolio was rebalanced annually and the other was left alone and allowed to run. By the end of the 1990s, the non-rebalanced portfolio’s assets had shifted to 72% stocks and 28% bonds. The stellar stock market performance in the 1990s resulted in a portfolio that became significantly more over weighted in stocks just prior to the bear market which began in 2000 and made the non-rebalanced portfolio subject to greater volatility than what was originally planned.Over the entire 20 year period, the non-rebalanced portfolio actually produced a lower return than the rebalanced portfolio despite a shift to a higher concentration in equities during the greatest bull market of the last century. Meanwhile, the risk (as measured by standard deviation) of the non-rebalanced portfolio was higher while the rebalanced portfolio produced a higher Sharpe ratio, meaning that the rebalanced portfolio produced greater return for its risk. We believe rebalancing can be a crucial element to helping reduce risk while ensuring a portfolio remains aligned with an investor’s intended asset allocation plan.As we mentioned before, rebalancing is simple with unit investment trusts. When a trust terminates, investors have the option to reinvest their proceeds, at a reduced sales charge, into a new, rebalanced and reconstituted portfolio.
- A large loss has a huge effect on compound growth rates – a loss of 50% requires a gain of 100% to break even. Given the asymmetry, prudent investors may find it worthwhile to sacrifice the chance of a fabulous gain to attempt to cut down on the chances of a horrendous loss. This means that as you reduce the chances of a strongly negative return, the median growth rate may improve.Rebalancing requires portfolio transactions, so the benefit has to be weighed against the costs incurred, including both direct trading expenses and taxes.An investor holding money in a taxable account must also consider tax implications. For those investors, it may be appropriate to rebalance on an annual basis in our opinion.
- Now that we’ve gone over some of the strategies to use to help increase your opportunity for success, let’s talk about how to invest using unit investment trusts (UITs). A UIT is a pooled investment vehicle in which professionally-selected securities are deposited into the trust. You will see, as we go over the features of UITs, that many of those success strategies are inherent in UITs.
- The securities are selected by a sponsor, the company that creates the trust such as First Trust Portfolios. Investors purchase units of a trust and each unit represents an undivided ownership interest in the assets contained in the trust.
- UITs have a long history. But, it wasn’t until the 1970s that UITs began to grow in popularity, primarily through fixed-income bond trusts. Since then, UITs have expanded to invest in multiple areas of the investment world and there has been more than $550 billion in new UIT deposits since 1990.
- In 1990, 93% of all new assets deposited in UITs were in fixed income portfolios. Over the years, the demand for equity UITs has grown and, as you can see, 90% of all new assets deposited in UITs were done in equity portfolios last year.
- We talked about market timing. UITs maintain a “buy and hold” philosophy, which is the belief that it is far better to purchase a well-chosen portfolio and hold it for a period of time, rather than “playing the market.” This helps eliminate emotional investing and the temptation to buy and sell for various reasons that an investor cannot control: the volatility of the stock market, interest rates, inflation and the overall economy, political elections, or the latest investment fad. This philosophy requires an investor to have patience and discipline rather than looking only for short-term performance. This approach has the potential to reward investors over the long term while allowing them to be less concerned with the day-to-day fluctuations of the markets.
- Buy and hold does not mean buy and ignore. Investors should meet with their financial advisor periodically to evaluate investments and ensure that they are still in-line with goals. Also as we discussed, investment allocations will change over time and should be periodically rebalanced.Because UITs have a stated maturity date, they force you to periodically revisit the assets. Upon termination of a UIT, investors have a decision to make. They can either:Take the proceeds in cash. Or, rollover their proceeds into a new trust if one is available. Although some unit investment trusts terminate in two years or less, we believe it is important to take a long-term approach. We generally encourage investors to consider investing in successive portfolios, if available. This rollover option provides the option to reinvest proceeds, at a reduced sales charge, into a new, rebalanced and reconstituted trust. It is important to note that this may cause a taxable event unless units of a trust are purchased in an IRA or other qualified plan.There is an additional option that can be done prior to maturity. Investors can elect an in-kind distribution at redemption with certain trusts. This option allows investors to receive shares of the underlying securities held in the trust as long as they own the required minimum number of units and satisfy the other requirements that are outlined in the prospectus.
- Many of the nuts and bolts of a UIT are very much the same as those success strategies that we talked about earlier. One of the key features of a UIT is that it provides diversification. You are not investing in one security, you are investing in a portfolio of several securities. You can choose from many different trusts, providing diversification at two levels: among different asset classes or within the same asset class or industry sector. A UIT is a fixed basket of securities held for a predetermined period of time - typically from 13 months to as many as 30 years and because the portfolio is fixed,they maintain a buy and hold discipline, encouraging investors to stay true to their investment strategy and avoid the pitfalls of emotional investing.UIT portfolios are set on the initial date of deposit and they do not change throughout the life of the UIT, adhering to a strict discipline of “buy and hold.”The rollover feature of a UIT helps to facilitate rebalancing. And finally, UITs have many options available to help you manage taxes and allow you make the decisions on when to pay taxes.