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What is an OEIC?

August 2019

Categories: Investing strategies

An Open Ended Investment Company (OEIC) is broadly similar to a unit trust in that it is an open ended collective investment that expands and contracts the number of units in circulation.

Unlike a unit trust, each OEIC operates as a limited liability company, quoted on the London Stock Exchange and unlike ‘unit holders’ that invest in unit trusts, those invested in OEICs are ‘shareholders’ in that investment company; OEICs are governed by company law rather than trust law.

OEICs are every bit as varied in terms of the asset classes, industry sectors and geographical territories they invest in and are generally considered to offer greater flexibility than unit trusts

Most new funds that are launched are established as OEICs and over time it is believed that many unit trusts will adopt the company structure.

A key difference is that unlike a unit trust, OEICs have a single price to buy or sell and the price of each unit is therefore a simple calculation of the total net asset value (NAV) of the fund divided by the number of units in circulation.

In the same way that unit trusts offer ‘income’ and ‘growth’ classes, so OEICs differ according to the way they deal with income.

The difference in structure also explains the differences in terms of the rights of the investor and the way in which their investments may be handled.

Investors in a unit trust own units in a fund without ever actually owning the assets it has purchased; OEIC investors hold shares in an investment company, which gives them the same rights as if they had invested directly in the equities the fund holds.

Another key difference is that, rather than just a single unit trust, an OEIC can operate a number of separate funds within the investment company, each with their own investment objectives.

Th, an investor in a particular OEIC could be invested in a fund that is targeting income as well as one that seeks capital growth; they may also have the benefit of switching between the two as their circumstances or
investment objectives change.

How much do OEICS cost?

Previously, fund investors faced two charges – an initial fee, and an annual management charge.

In unit trusts, the initial fee, often around 5 per cent, was the spread between the bid and offer prices on the day of purchase and with just one price OEICs simply charged a percentage of the overall investment.

Actively managed funds also typically charged around 1.5 per cent as an annual management charge (AMC), but with the addition of admin, legal and custodian fees, the total annual cost of a fund was often much higher than the AMC which was quoted as the total expense ratio or TER.

However, the government’s 2012 Retail Distribution Review introduced new rules banning commission from fund charges being paid to financial advisers and brokers, which has reduced fund charges significantly.

Most fund groups have done away with initial charges and ongoing charges have typically reduced by half.

The average AMC on an actively managed fund is now around 0.75 per cent, rising to around 0.85 per cent when the additional expenses are added to make up the full ongoing charge figure (OCF) which replaces the old TER.

Author: Focus on Funds Categories: Investing strategies

Focus on Funds is an e-magazine from DIY Investor.