Estimated Current Return

What Is an Estimated Current Return?

Estimated current return is the return that an investor can expect for a unit investment trust over a short period of time—for instance, annually. It is actually an estimate of the interest that the unit holder can expect to receive. The return can be found by taking the estimated annual interest income from the securities of the portfolio and dividing by the maximum public offering price, net of the maximum sales charge for the trust. 

Key Takeaways

  • Estimated current return is an estimate of the short-term return of a unit investment trust.
  • It is found by dividing the the estimated annual interest income by the maximum public offering price, minus the maximum sales charge.
  • Estimated current return may be distorted by interest rate risk and by bonds held in a portfolio that trade at a premium or discount on the market relative to their par value.

Understanding Estimated Current Return

The estimated current return is not as exact as the estimated long-term return. Also, typically the estimate is more susceptible to interest rate risk during the life of the portfolio. Fund managers reporting estimated long-term return will be able to arrive at the estimate because the underlying fund investments have a specified return that is given at the time of initial investment. Notably, interest rate risk is most relevant to fixed-income securities; a possible rise in market interest rates presents a risk to the value of fixed-income securities. 

By definition, the estimated long-term return is a hypothetical measure that gives investors an expectation for the return over the life of an investment. The estimated long-term return can be a helpful consideration when determining whether to invest in a fixed-income product

It is most often quoted in investments with fixed-income securities and a fixed duration. For example, a unit investment trust (UIT) is an investment company that offers a fixed portfolio of stocks and bonds as redeemable units to investors for a specific period of time. It is designed to provide capital appreciation, and in some cases, dividend income. 

Unit investment trusts, along with mutual funds and closed-end funds, are defined as investment companies. When looking to invest in this type of trust, an investor should be shown the estimated long-term return as well as estimated current return. The measure is comparable to a savings account rate or the rate of interest quoted for a certificate of deposit. 

Estimated Current Return and Transparency

Unit investment trusts, and specifically UIT portfolios with a high allocation to fixed-income investments, can be a good way for investors to access an investment vehicle that can provide some measures of transparency for long-term returns. These investments are one of three formal investment companies regulated by legislation from the Investment Company Act of 1940, which requires investment company registration and regulates the product offerings issued by investment companies in the market. Unit investment trusts are created by a trust structure and issued with a fixed maturity date

When estimated current return was first developed, interest rates were fairly stable and the normal practice was to buy and deposit bonds at par, and before 1989, estimated current return was the preferred performance measure used by fixed income UITs. As interest rates became more volatile in the 1970s and '80s, the practices of some UIT sponsors began to change. In 1989, the SEC became aware that some UITs were investing a significant portion of their assets in premium bonds.

While a trust's estimated current return measures anticipated cash flows with reasonable accuracy, it does not take into account the effect market discount or premium on bonds in a portfolio in the way that the yield to maturity of a bond does. As a result, the estimated current return of a fixed income UIT comprised of premium bonds can overstate the return that may be reasonably anticipated over the life of the investment. In response to concerns expressed by the SEC that the estimated current return quoted by UITs could mislead prospective investors, the industry developed the estimated long-term return as a solution to the limitations of estimated current return.

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