Defined Outcome Investing
Managing Volatility and Reaching Your Investment Goals
Developing a plan and sticking to it has proven to be the best recipe to achieve one’s long-term investment goals. But sticking to the plan can be difficult. With market risks and changing outlooks, investors are often tempted to make changes to their investment mix too frequently, which can jeopardize long-term goals. Defined outcome investing offers a flexible approach that modifies a passive investment’s risk/return profile in order to achieve a predetermined outcome in a predetermined time period. In other words, it allows an investor to customize their investment around a defined set of parameters (the outcome), providing market exposure with greater control in limiting losses.
Benefits of defined outcome investing include:
- Aligned with your goals — Investments that are aligned with your investment objectives or market outlook
- Customized — Select the equity market exposure you are seeking (e.g. domestic, international, emerging markets) and customize according to your risk tolerance and investment time horizon; defined maturity dates can also align with your goals, market views, and liquidity needs
- Downside protection — Select a predetermined degree of downside protection: full, partial, or none at all
- Fiduciary approach — Full transparency on fees and holdings; no early redemption penalties or charges
There are three primary outcomes that investors may customize to suit their risk/return profiles:
Accessing defined outcome investing through unit investment trusts (UITs) There are a number of ways to approach defined outcome investing, all of which may provide benefits to investors. We believe unit investment trusts, or UITs, are one of the more efficient entry points. A UIT is an investment vehicle comprised of securities with a scheduled maturity date that offers exposure to an underlying index. It is an Investment Company Act of 1940-registered vehicle like mutual funds and ETFs.
Benefits of UITs:
- Portfolio is professionally selected and structured, but the underlying asset is passive so there is no manager risk or rebalancing necessary.
- Full transparency of fees and asset holdings, investors know what they own
- Daily liquidity at NAV (similar to a mutual fund)
Putting defined outcome investing to work
If you are looking for a solution that can help you reach your long-term goals while adding control to your investments:
- Investors: Speak with your financial advisor about defined outcome investing.
- Wirehouse/independent advisors: Call 888-474-7725.
- RIAs: Call 877-742-6951, Option 2.
Before you invest
A unit investment trust (UIT) is a professionally selected, pooled investment vehicle in which a portfolio of securities is selected by the sponsor and deposited into the trust for a specified period of time. Generally, a UIT portfolio is not actively traded and follows a buy and hold strategy. A UIT is registered with the SEC as a Registered Investment Company (RIC) or Grantor trust. Trusts are categorized into these two different structures, based on the underlying holdings, for tax purposes. Consult your financial advisor for primary differences between these two structures. The portfolio will generally remain fixed until the termination of the trust, usually ranging from 13 months to five years. Some UITs, composed of fixed income securities, may have longer maturities depending on the underlying securities. As the underlying bonds in the portfolio mature or are called in early, principal is returned to the investor. Although the securities within the trust generally remain fixed and are not managed, the sponsor may remove a security from the trust under limited circumstances. These situations are outlined in the prospectus.
The portfolio is designed to follow an investment objective over a specified time period, although there is no guarantee that the objective will be met. UITs are created by a trust sponsor who enters into an agreement with a trustee. When the trust is created, several investment terms are set forth, such as the trust objective, what securities are placed in the trust, when the trust will end, what fees and expenses will be charged, etc. A full accounting of the terms of the trust will be listed in the prospectus. Some UITs follow rules-based stock selection strategies, which have hypothetical performance records dating back over several decades; this information can help investors decide if the investment strategy might be appropriate for their objectives and goals. Keep in mind that hypothetical performance, like any past performance, does not guarantee future results, which will differ from actual past performance.
The popularity of unit investment trusts results from many investor benefits and features including professional selection, diversification, daily pricing and redemption, and ease of purchase. Investors should note that diversification does not ensure a profit or guarantee against a loss.
While past performance is not indicative of future results, a UIT’s long-term performance record is also likely to be factored into the selection criteria. Your financial advisor will help you compare and review UITs in light of your investment objectives and risk tolerances.
Since UITs have a fixed time horizon, investors at termination can elect to use the proceeds of the terminating trust to purchase a new UIT or the proceeds will be credited into the investor’s account at the net asset value. Prior to the trust’s termination, investors may sell/redeem their UIT shares at the NAV less any deferred sales charges, if applicable. Selling UITs prior to maturity may increase the annualized costs. The proceeds from the sale will be credited to the investor’s account two business days after the sale (T+2). Also, under limited circumstances, certain trusts allow investors to elect to receive their pro-rata shares in-kind, but this may create a taxable event.
UIT sponsors generally offer successive “series” of each UIT, giving you an option of reinvesting in the same objective or strategy with an updated portfolio of securities.
“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly-owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member of FINRA/SIPC.