Stock Selection Skill, Manager Flexibility, and Performance: Evidence from Unit Investment Trusts

Abstract

Unlike mutual funds, unit investment trusts invest in a fixed portfolio of stocks for a predetermined period of time and hold limited cash positions. Thus, UITs provide an ideal sample to measure stock selection skill. We examine a sample of 1487 UITs over the period 2004 to 2013. We find that UITs generate significant negative alphas indicating poor stock selection skills. We compare the UITs to actively managed mutual funds characterized by high turnover ratios and high cash holdings. The UITs significantly underperform both groups of mutual funds suggesting that restricting flexibility and maintaining full investment in the market does not result in better risk adjusted performance.

Keywords: unit investment trust, portfolio evaluation, mutual funds

JEL Classification: G10, G11, G19