DOGS OF THE DOW ARE UNLEASHED — COULD IT BE TOO LATE? LOOK OUT, UNIT TRUST PACKAGERS: CHAS. SCHWAB IS JOINING THE FRAY

Besides mighty Merrill Lynch & Co., no firm has benefited more from the current bonanza in equity unit investment trusts than Nike Securities L.P., the Lisle, Ill., boutique controlled by investment marketing wizard Robert Van Kampen.

Propelled by the bull market, equity unit investment trusts, or UITs — closed-end funds with pre-set portfolios that have terms of one to five years — pulled in $35.9 billion in new sales last year. That’s 11 times the volume sold just three years ago.

Merrill moved about 31% of last year’s total $38.5 billion in UIT sales through its battalion of 13,300 U.S. brokers. Meantime, Nike with its network of regional brokerages, says it sold $5.6 billion in UITs last year.

Now it looks like discount broker Charles Schwab & Co. might introduce its brand of cost-cutting to UITs — and that could spell trouble for Nike and other UIT packagers.

Schwab in November began offering a clone of the industry’s best selling 13-month UIT packaged with the top 10-yielding Dow Jones Industrial Average stocks. Schwab’s product comes with a 1.25% sales charge and a 1% fee for rolling into a new UIT upon expiration — about half the 2.75% to 4.5% loads charged by most comparable UITs.

“The idea that they’ve halved expenses is good,” says Mark Balasa of Balasa & Hoffman Investment Management, a fee-only financial planner in Schaumburg, Ill., overseeing $115 million “But it’s a marketing ploy chasing an inefficiency that’s already been discovered,” he adds.

Indeed, annually investing in the 10 highest yielding Dow stocks — a strategy known as Dogs of the Dow — has underperformed the index in three of the last five years.

Schwab’s initial effort attracted some $90 million when it closed in late January. That’s not a huge showing but so far the brokerage, which also sold over $1 billion of other firms’ UITs in 1997, is hawking the product only to its existing customers. Schwab also is hoping to lure fee-based planners into UITs by offering a deeper discount versio
n to the 5,000 who use its account management services, trimming sales and rollover fees to 1% and 0.8%, respectively.

Schwab’s cost-cutting could cause a headache for Nike, which derives virtually all of its estimated $45 million in revenues from UITs.

It also might force rivals to eventually lower their own fees. So far, Merrill, Nike and other UIT sponsors say they have no plans to do so. “We are dependent on the broker-fed market and that is not the market Schwab is going after,” says Nike Vice President David Partain. “We have no plans to cut our fees, but pricing is constantly being looked at.”

Schwab’s push into UITs not only raises questions for Nike, but also for other UIT packagers such as Mr. Van Kampen’s onetime employer, Chicago’s John Nuveen Co., and the firm he co-founded, Oakbrook Terrace, Ill.-based Van Kampen American Capital, which is now owned by Morgan Stanley Dean Witter Discover & Co. Both have been late entrants to the equity UIT business.

selling pressure

Competition is not Nike’s only potential worry. Industry sources say Mr. Van Kampen may be facing pressure to share more of his estimated 40% equity stake with Nike managers who oversee the firm. Currently five Nike executives — CEO James Bowen and Managing Directors Frank Fichera, Robert Hall, Ronald McAlister and Richard Olson — and two outside limited partners own about 60%.

Mr. Van Kampen, 59, doesn’t talk much these days about his corporate interests. He has spent the last few months recuperating from heart-related health problems and hasn’t involved himself in Nike’s day-to-day operations for several years.

dogs rule

Some speculate he might even sell his interest in Nike or seek a strategic partner. “There are no discussions going on about the sale of the assets, nor do we have any interest in disposing of our interest,” says David Allen, general counsel for Van Kampen Asset Management, which oversees Mr. Van Kampen’s investments. However, late last year, Mr. Van Kampen did agree to
sell his interest in New York credit rating company Fitch Investors Service L.P. to a French rating company.

Equity UITs have come a long way in a short time. For decades, the UIT market was dominated by taxable and municipal bond products. But in 1997, just $2.6 billion of the $38.5 billion in UIT sales were fixed income, according to the Investment Co. Institute in Washington.

Part of the equity surge came after the 1991 book “Beating the Dow,” which popularized the easy-to-understand, contrarian Dogs of the Dow investing strategy. Investors buy the Dow’s 10 highest yielding stocks and rebalance the portfolio every 12 months in hopes of outperforming the index.

Though gross profit margins for UIT issuers have more than halved to 0.75% of assets, from 2% in the late 1980s, net profits for firms exceeding $3 billion to $5 billion in annual sales can still reach 0.34% to 0.45% of UIT assets, says Dan Waldren, head of UIT product development at Van Kampen American Capital.

By extending UITs to equities, Merrill Lynch, Nike and others resuscitated a product that had been left behind by the bull market. The question is whether Schwab may be too late to crash the party.