By CAROLE GOULD

Published: October 26, 1997

Investors intrigued by the »dogs of the Dow» strategy now have a new alternative to the three mutual funds and several unit investment trusts that practice the theory: the Charles Schwab 10 Trust.

The Schwab vehicle is itself a unit investment trust, meaning that it invests in a fixed portfolio of securities for a fixed period. All of these Dow-dog trusts, which are renewable every few months in a new series, offer a more focused portfolio than the three mutual funds, and the Schwab version aims to undercut the high expenses of the other trusts.

Analysts, however, caution that such investments, whether funds or trusts, may yet become victims of their increasing popularity.

The »dogs of the Dow» strategy involves investing in the 10 highest-yielding — and therefore cheapest — stocks of the Dow Jones industrial average.

The leading sponsor of the unit investment trusts, which invest equal amounts in only the Dow dogs, is a consortium of brokers led by Merrill Lynch. The trust has an initial sales charge of 1.0 percent plus continuing annual expenses of 1.75 percent.

By contrast, Schwab’s initial charge is 1.25 percent of the amount invested, with anticipated annual expenses of 0.25 percent, and — unlike Merrill Lynch’s trust — a 1 percent charge for rolling over into a new series. Subject to regulatory approval, the initial sales charge will be phased in starting in the fourth month after the investor buys in.

And investors who own similar unit investment trusts offered by other firms can roll them into Schwab’s, also for a fee of 1 percent.

None of the three Dow-dog funds levy a sales charge, but one has higher expenses than the leading unit investment trust and all invest in vehicles beyond the Dow dogs, in part to be able to meet redemptions and other fund requirements.

Hennessy Balanced, started in March 1996 and the oldest of the three funds, has an expense ratio of 1.9 percent, according to Morningstar Inc. the fund researchers in Chicago; the fund is half dog stocks and half short-term United States Treasuries. O’Shaughnessy Dogs of the Market, which reported annual expenses of 1.7 percent at its start-up last November, devotes roughly one-third of its portfolio to the dogs, and the balance to about 30 to 40 other high-yielding stocks. Payden & Rygel Growth and Income capped annual expenses at 0.54 percent of assets at its start-up at the end of last year; its portfolio is half dog stocks and half Standard & Poor’s 500-stock futures.

Schwab calculates that its unit investment trust is substantially cheaper for investors than replicating the Dow-dog strategy on their own. It costs $125 to invest $10,000 in the trust, compared with $470 in commissions to buy the 10 stocks individually through Schwab.

The initial offering price of the Schwab trust is $10 a unit; the minimum initial investment is $1,000, or $250 for retirement accounts. The Merrill Lynch trust has a price of $1 a unit and a $250 minimum initial investment.

Schwab plans to issue a new series of its trust about every three months, for terms of just over a year each (to avoid the higher tax rate for any capital gains earned on investments held for 12 months or less). Merrill Lynch issues nine series a year, with terms also just over 12 months.

After the initial pricing date, investors in the Schwab trust will buy shares at market price. Each series closes to new buyers after three months. The subscription period for the first series closes on Nov. 4.

Pricing aside, the question for investors is whether the »dogs of the Dow» strategy works.

In the short term, the strategy is subject to the vicissitudes of the market. So far this year, the three mutual funds and the Merrill Lynch trust that started on Jan. 2 have underperformed the Standard & Poor’s 500, a result of the fact that the Dow stocks have been trailing the S.& P. in general this year, said Susan Dziubinski, editor of Morningstar Investor. (For performance statistics on unit investment trusts, investors must rely on company reports.)

Buying the Dow dogs alone, however, has offered good long-term returns, probably because the strategy has put investors into fairly solid companies that have only temporarily fallen out of favor. A $10,000 investment in the dogs in 1976, adjusted yearly, would have yielded $341,656 in 1996, while the same investment in the S.& P. 500 would have climbed to only $184,192. An investment in the full list of Dow stocks would have risen to just $177,722.

But that advantage may change, Ms. Dziubinski cautioned. »If the Dow-dog strategy becomes too popular, it will lose its contrarian edge,» she said. »The key to the strategy working is that it’s based on buying overlooked, unpopular stocks.»

New Firm for Marsico

The fund manager Thomas F. Marsico, who left the Janus Company in mid-August over what the company termed »philosophical differences» has started his own shop.

Marsico Capital Management, in Denver, will manage mutual funds in addition to separate accounts and institutional money. Shares in two funds — Marsico Focus, a long-term growth fund, and Marsico Growth and Income — are expected to become available for sale in mid-January.

At Janus, Mr. Marsico managed Janus 20, which gained 30.7 percent a year, on average, for the three years through September, according to Morningstar. He also managed Janus Growth and Income, which rose 30.4 percent annually in that time.

In Brief

Founders Funds has a new educational guide exploring the psychology of investing. It is available free at (800) 525-2440 or on the company’s site on the World Wide Web (www.founders.com).