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OEIC

What are OEICs (Open Ended Investment Companies)?

OEICs are collective investment vehicles, similar to unit trusts but structured as companies rather than trusts. OEICs came into being in the UK in 1997.

The main advantage of OEICs for fund managers is that they comply with the European Union's "Undertaking for Collective Investments in Transferable Securities" (UCITS) which allows regulated funds investing in "transferable securities" (i.e. securities that are traded on an open market) to be sold across national borders in the EU.

A number of UK fund managers have since converted their unit trust funds into OEICS in order to market them within the European Union.

OEICS like Unit trusts cover a variety of funds such as income funds, growth & income funds or growth funds. The funds are grouped together in sectors, covering general principles of style, area and risk level that the fund has chosen to invest in. These range from investing in a particular geographic area such as Europe or Japan, to more specialised categories such as technology. Funds can also be split into two categories in terms of the way that they are managed - actively managed or passively managed. In an actively managed fund the fund manager is responsible for the selection of the shares within the portfolio. A passive fund is more regulated, with the fund following the performance of a particular index (e.g. the FTSE 100). With all these different unit trusts the value of the units may fall and rise depending upon the performance of the fund. Increases are not guaranteed.

OEICS are flexible and have no lock-in period, allowing for withdrawal at any time. However, OEICS are generally seen as medium to long-term investments that are expected to be held for at least five years.

OEICS are generally viewed as medium risk investments, although the exact risk level will depend on the type and fund selected.

The pricing of OEIC shares is based on Net Asset Value (NAV), usually applied on a forward rather than on an historic basis (i.e. at the next valuation point rather than at the last valuation point).

Pricing of OEICS v Unit Trusts

In reality the OEIC pricing system is not very different from that for unit trusts. Despite the so-called "single pricing", a de facto "spread" exists when the initial charge and dilution levy are included. The practice of charging a dilution levy is similar to widening the spread on unit trusts to cover dealing costs. It is arguable that OEIC pricing is more transparent and fairer than unit trust pricing because the initial charge and the dilution levy are both explicit and fall upon those who are creating expenses for the fund.

If you would like advice on investing in OEICS please contact us.