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Unit trusts are a simple way to invest, but their fee structures may be cost prohibitive for some. Unit trust companies, in their fact sheets, provide proven selection processes that one is able to replicate. By using their proven track records, one is able to develop a nice portfolio that works well with a “Buy and Watch” philosophy. Equity unit investment trusts are interesting allocation vehicles that have been around since the Investment Company Act 1940. They are investment companies, and the easiest description one can give is they provide a list of researched stocks that one can hold for periods ranging from 15 months to four years. They are unmanaged, as the stocks are selected with the philosophy of holding them throughout the maturity period. When the trust matures, one can take the value of the investment at NAV, or reinvest everything in another portfolio as a “rollover”. Rollovers are usually free. Conceptually, I like them, because they fit well within a “Buy and Hold” strategy, but allow one to make periodic changes over the years. The fee structures, though, make them prohibitive for those who are looking for a way to keep costs down. Fees for First Trust’s Capital Strength Portfolio average an initial 1.975% per year. Invesco’s Dividend Income Leaders Strategy Portfolio has an average annual initial fee of 2.36%. Both of these annual fees are reduced to 1.475% and 1.56% respectively with the free rollovers they provide. There are break points for high net worth investors where the fees can be reduced to 0.725% for First Trust and 0.32% for Invesco. Don’t misread as one saying these strategies do not work. They do. The question is whether one wants to pay the fees. If you don’t, then steal their homework. If one studies the fact sheets these companies provide, they do have fairly easy strategies that can be replicated on one’s own. Take the Capital Strength Portfolio for example. The fact sheet has these parameters for its stock selection process: Begin with the S&P 500 Cash greater than $1 billion Long Term Debt/Market Value of Equity < 30% Return on Equity > 15% Cash Flow Analysis and Analyst Judgment Hold for 24 months Does this strategy work? It sure does. I ran a general backtest to see how this approach performed since 1989. The results? How does an average annual return of 14.46% (σ = 23.82%) work for you? The S&P 500 averaged 10.14% during the same period; an excess of 430 basis points that is nothing to sneeze at. Given that a basic portfolio screen returns around 30 stocks, this is a fairly manageable strategy if one is willing to let the strategy play out over a two year period. The following table provided is a list of potential stocks for a 24 month portfolio: Ticker Name AAPL Apple Inc ACN Accenture PLC ADP Automatic Data Processing Inc. AFL AFLAC Inc AGN Allergan Inc. AVGO Avago Technologies Ltd BEN Franklin Resources Inc BIIB Biogen Idec Inc CA CA Inc CMI Cummins Inc. CTSH Cognizant Technology Solutions Corp EXPD Expeditors International of Washington Inc. FLR Fluor Corp GD General Dynamics Corp GOOG Google Inc GRMN Garmin Ltd INTC Intel Corp JNJ Johnson & Johnson LLY Eli Lilly and Co LRCX Lam Research Corp MA MasterCard Inc MSFT Microsoft Corp NKE Nike Inc PCLN Priceline Group Inc (The) PG Procter & Gamble Co (The) PH Parker-Hannifin Corp QCOM QUALCOMM Inc. SLB Schlumberger Ltd TROW T. Rowe Price Group Inc WDC Western Digital Corp XOM Exxon Mobil Corp YHOO Yahoo Inc Is there another way, though? What if you want to be a completely passive investor, but like this approach to stock selection? Well, there is an option for that too. Using the Capital Strength Index, which has many of the same screening criteria, The First Trust Capital Strength ETF (NASDAQ: FTCS ) is a nice way to go. It is a managed ETF with a moderate fee structure (0.76% gross), and has performed nicely since inception, and still beats the S&P 500. The way I see it, this is a nice passive way to invest, and still get performance from one’s portfolio. The 30 or so stocks are easy to watch and hold, and one only has to restructure biannually. It is an idea one should consider, if indexing is not part of the strategy. It is suggested here to study the strategies, and find one that works for you. If you would rather someone else do the work, then hire the companies and buy one of their portfolios. If that is even too much work, buy the ETF. Happy Investing! Disclosure: The author is long CTSH, QCOM. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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