Advisors Asset Management Inc. hopes to reshape the landscape for municipal bond unit investment trusts with a series of bigger, lower-cost UITs.
The Wichita, Kan.-based fund sponsor on Friday launched the Insured Tax Exempt Municipal Portfolio, Series 1, which AAM claims is one of the biggest muni UITs since 1982.
Eighty brokers participated in the trust's $115 million offering. The trust invested in 18 issues with an average maturity of a little more than 14 years and an average yield of about 4.9%. All the bonds are insured by Berkshire Hathaway Assurance Corp.
The trust is unique in two ways - it is bigger than most muni UITs, and it carries lower fees.
According to its prospectus, the trust charges a sales fee of 2.5%, plus annual operating costs of 0.14%.
By comparison, Van Kampen Investments' Insured Municipals Income Trust, Series 556, introduced this month, charged a sales fee of 4.9%, plus annual expenses of at least 0.24%.
An AAM trust focusing on New York municipal debt launched this month charging a sales fee of 4.7% plus annual fees of 0.28%.
"AAM is trying to reinvent the fixed-income UIT business by lowering the expenses," said Richard Stewart, AAM senior vice president and UIT product manager. "It was intentional. ... We wanted to improve the yield."
The firm is banking on lower expenses to rekindle interest in a product that has been waning for decades.
According to the Investment Company Institute, assets in tax-free muni debt trusts have dwindled from $91.74 billion in 1990 to $7.68 billion at the end of 2007.
Muni UITs attracted $438 million in deposits last year, compared with $5.64 billion in deposits in 1990.
Meanwhile, muni mutual funds' assets have more than tripled since 1990 and closed-end muni funds' assets have surged 48% since 1995.
Yet another municipal investment vehicle - the muni ETF - came to the market last year. Low fees are among the qualities ETF managers have highlighted in marketing to clients.
Aside from low fees, this UIT is also unusual in its size.
ICI data states that the $7.68 billion in muni trusts at the end of 2007 was divided among 3,739 tax-free trusts. That implies the average muni UIT has less than $2.1 million in assets, making AAM's Insured Tax Exempt Municipal Portfolio 50 times larger.
The trust's bonds, selected by portfolio consultant SMC Fixed Income Management LP, come from 10 states and the District of Columbia, with the biggest concentration in Washington, Florida, and Illinois.
A trustee funnels the coupon payments from the bonds in the trust to unitholders as monthly dividends. The trust terminates in 2026, at which point the remaining assets will be repaid to unitholders. Units are redeemable at net asset value, which is updated daily.
AAM is gauging interest for a second series, slated for launch next month.