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 if 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.