Open Ended Investment Companies
OEICs
What are they?
OEICs were introduced to bring
the structure of UK open-ended investment vehicles
into line with the rest of Europe, and so to widen
the opportunities for UK investment providers.
OEICs combine a number of
features of unit trusts and investment trusts and a
number of unit trust providers in particular have
already converted some of all of their funds to OEICs. The principle remains that this is a vehicle
for the private investor to obtain professional
investment management.
An OEIC is constituted as a
company, so investors purchase shares. A major
difference between OEICs and investment trusts is
that the number of shares in issue varies according
to demand – hence the use of the expression
“open-ended”. This means that the shares price
always reflects the underlaying asset value and is
not affected by market sentiment towards the OEIC
itself. This reduces the risk, which, for OEICs in
general, is broadly inline with unit trusts rather
than investment trusts.
Who are they for?
OEICs enable investors to
participate in the potential rewards of investment
in equities and/or fixed interest stocks. They
enable the investors to do so through a wide spread
of investments thus providing investors with
improved security than possibly dealing direct
through a smaller number of holdings.
How do they work?
OEICs are intended to be simple
and accessible and, for example, will operate on the
basis of a single price (in other words there will
be no bid/offer spread, though there may be an
initial charge, which will be specifically
identified). During periods of heavy withdrawals
the Provider may make an extra charge called a
Dilution Levy.
OEIC managers raise money by the
sale of units to form an investment fund. The sale
of units is ongoing and they may be bought with lump
sum investments or by regular savings plans.
The regular premiums invest in
‘units’ of the fund selected, the price of which
will reflect the value of the underlying
investments, which may be prone to fluctuation.
This can work in the investor’s favour in that when
unit prices are low, the regular premium buys more
units than if the price were high. As long as
prices rise before maturity then this can be
beneficial as more units are then held. This
concept is known as pound cost averaging.
Each unit holder receives the
distribution per unit multiplied by the number if
units held. Most unit trusts allow unit-holders to
reinvest in the trust by using their net
distribution to buy more units at the prevailing
unit price. This can be done automatically if the
unit-holder opts for accumulation the income of
which is automatically reinvested. Investors who
wish to receive the income distribution are
allocated income units. Investors who reinvest the
net distribution, whether or not this is done
automatically through accumulation units pay income
tax on the gross amount at their highest tax rate.
Unlike Investment Trusts there is
no facility within OEICs to borrow for investment
purposes.
What is the tax position?
The tax provisions relating to
OEICs are consistent with those that apply to unit
trusts and investment trusts, with income
distributed to investors with the normal associated
tax credit.
Capital gains made by the
managers within the portfolio suffer no tax, but the
investor may (dependent on his or her own
circumstances) have a personal CGT liability on
disposal. Whatever your financial advice requirements are,
you can be assured that Ashton Hoyle are well
positioned to provide an innovative answer and we
look forward to speaking to you on any financial
matter. Contact us now
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