Advisors Asset Management Inc. launched the biggest-ever municipal bond unit investment trust earlier this month as a rally in munis lured investors to the company's new low-cost structure.
The Monument, Colo.-based investment company last year unveiled plans to reinvent the muni UIT by cutting fees, effectively boosting the return to the investor.
AAM has since launched three insured muni UITs. The latest, called the Insured Tax Exempt Municipal Portfolio, Long-Term Series 1, drew $138.5 million from 59 firms on Feb. 12.
According to AAM, the previous record for a fixed-income UIT was $128 million, in 1982.
"We continue to see strong retail demand for municipals," said Richard Stewart, who runs AAM's UIT business. "We're doing business with financial advisers that perhaps have never done business with AAM and perhaps have never purchased a UIT before."
When investors buy shares in a UIT, they buy partial ownership in a trust populated with an investment, in this case municipal bonds insured by Berkshire Hathaway Assurance Corp.
Unitholders are entitled to the cash flow generated by the trust. When the bonds in the trust mature, the principal is returned to the unitholders rather than reinvested. When the last bond has matured, the UIT ceases to exist.
This UIT differs from AAM's first two in its maturity. While the first two invested in bonds with average maturities less than 15 years, this UIT's average maturity is closer to 22 years. This UIT will expire in September 2039.
Stewart said the company saw greater value in longer-term munis so it decided to obtain extra yield by going farther out along the yield curve.
This UIT expects to offer a long-term, tax-exempt return of 4.3% annually. The last UIT's expected long-term return is 3.98%.
"We just feel like we found a sweet spot with this product," he said.
UITs have been in decline for several decades. According to the Investment Company Institute, UITs' assets have shrunk 73% since boasting $105.39 billion in assets in 1990.
The trend is more pronounced for muni UITs. Muni UIT assets have plunged from $91.74 billion in 1990 to just $6.46 billion at the end of 2008.
SMC Fixed Income Management LP, portfolio adviser to the UIT, selected munis from 18 issuers to populate the fund. The biggest holdings are $20 million of senior-lien revenue refunding bonds from the Detroit Sewage Disposal System and $10.4 million in revenue bonds from the Baltimore Convention Center Hotel.
Because of the insurance from BHAC, all bonds in the portfolio are rated triple-A by Moody's Investors Service and Standard & Poor's.
The UIT charges fees of 1.5% to 3%, depending how many units the investor buys. The UIT's ticker symbol is AAMEDX.
AAM plans a second series for the UIT next month.
