Bonds packaged into 'unit trusts' moving well on brokers' shelves
''The packaging business is going like gang busters,'' John Wsol says.Skip to next paragraph
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Mr. Wsol is not talking about cereal boxes and car bodies. Wsol is vice-president of Chicago's Tax-Exempt Bond Fund. He was referring to ''unit trusts,'' which are ''packages'' of a number of medium- or long- term bonds (corporate or tax-exempt municipal). Unit trust sponsors then sell shares of the packages to mostly individual investors.
Like many other fund managers, Wsol has lived through some volatile months in the bond market. And he sees nothing in the near future to reduce the volatility of the nation's tax-exempt bond market.
Nonetheless, many investors who want a share of the bond market - no matter how changeable - are investing in one of the many unit trusts or bond funds. The funds are managed. Their investment managers will buy and sell bonds from their porfolios as cash flow or market opportunities present themselves. The unit trusts, usually sold by brokerage houses to their customers, are not managed. The packages of bonds are held intact until they mature, with distributions to the owners along the way.
''As a whole, the tax-exempts have really taken a bath . . . after we saw a rally a month or six weeks ago,'' Mr. Wsol notes. ''But the series (unit trusts) have sold throughout. I guess that's because they have got the distribution; they've got all those brokers selling. It's a good product and they can make a buck at it.''
One variation of a managed bond fund is a tax-exempt money market fund. These buy ordinary state or municipal bonds which will shortly expire, usually within a year, or special short-term debt paper specifically created by states and municipalities for these funds. Income from these investments is exempt from federal taxes. Unlike the regular tax-exempt municipal bonds funds, they are thriving.
''Our (standard) tax-exempt fund has not gone well for several years,'' says Carlos Aguila, an account executive for Dreyfus Service Corporation in New York. ''In 1977 at the end of the fiscal year, it was selling for $16.04 per share. Now we're selling them for $8.64 per share. Year after year, people say the market has bottomed out and year after year we hit a new bottom.
''But the tax-exempt money market fund is more for the prudent investor. This short-term fund would yield, today, 7.56 percent per share, but because it's tax-exempt, the effective yield would be 15.12 percent for someone in the 50 percent tax bracket. People who invest in this fund are not interested in striking it rich and experiencing a great capital gain. This is a good fund for people in a high tax bracket,'' Mr. Aguila says.
As for the Reagan administration's effect on the municipal bond market, reactions range from guarded to doubtful.
''I think Mr. Reagan has a very difficult job trying to blend the fight against inflation with unemployment in an election year,'' says Marshall Front, a partner at Stein, Roe & Farnham, a Chicago-based mutual fund. ''I believe it's likely that the pressures will mount this spring for easier money and lower interest rates, to try to provide some impetus for the recovery of business. The administration, in turn, will be applying pressure to the Fed (Federal Reserve System).''
A different point of view was offered by William Beuching, first vice-president and director of fixed-income investments at Kemper Financial Services in Chicago.
''I don't think anything the administration does is going to have a near-term effect on the market,'' Mr. Beuching says. ''The municipal bond market is already beat up so badly. Banks and insurance companies are pretty much out of the market. I think the shift of responsibilities back to state and local governments will mean their taxes will have to go up. So the state and local issuers (of tax-free bonds) will be borrowing more, and that can result in the deterioration of credit ratings over time, with some of the lower-quality units finding themselves in trouble.''