Britain joins the rest of Europe

OPEN-ENDED FUNDS

With the slick patter of a tied life insurance salesman, Anthony Nelson, the Treasury Minister, this week unveiled the Government's "new generation of savings vehicle".

"We are offering smaller investors a flexible way of building up their savings," he promised and promptly gave the nation more than 200 pages of draft regulations and comment for open-ended investment companies.

The OEIC (unfortunately pronounced oik) is nothing more complicated than a corporate version of a unit trust and the benefits to the private investor are essentially the same as those of a unit trust. Instead of units, investors will buy and sell shares of a company that may, but not necessarily, be quoted.

The Government is promising the same level of investor protection and the same tax treatment.

The advantages over unit trusts are that Oeics will offer greater flexibility.

At the moment, a unit trust investor must sell the units of one trust and buy the units of another to alter the weighting of a portfolio - an expensive business. The Oeic will act as a corporate umbrella for a number of funds, allowing investors to switch easily (and more cheaply) between them.

Investors will also benefit from single pricing. Oeic shares will be bought and sold at a single price, eliminating the wide bid/offer spread on unit trusts that can cost investors dearly.

A third advantage is that Oeics will have different classes of shares reflecting different charging structures and different funds. Shares sold direct to the public, for example, may have lower charges than those sold through intermediaries.

The disadvantages of Oeics amount to no more than those of unit trusts. The single pricing formula should eventually apply to unit trusts as well but this will not necessarily make for cheaper dealing in either. The Securities and Investments Board is still drafting detailed rules on charges and pricing formula.

Professional fund managers agree that the Treasury proposals will prompt a fundamental shake-up of the British investment industry. The Association of Unit Trusts and Investment Funds reckons most unit trusts will have converted to Oeics within two years.

But the real beneficiaries will be the fund managers. The debate over whether to switch retail investment funds from parochial trust-based vehicles to internationally recognised ones has essentially been a debate about reversing the flow of funds from London to offshore centres.

The Oeic is intended to help UK fund managers compete for overseas investors and it will allow the payment of gross dividends for non-UK residents.The impact on the domestic investor will be limited to the legal structure of the investment vehicle. If an exisiting unit trust wishes to convert to an Oeic, the fund manager will need the agreement of the unit-holders. But no changes will be needed to the underlying fund. Once converted, the new shareholders will also have the right to attend an annual meeting.

Investors' money will be protected by a depository, equivalent to the trustee, who will hold the fund assets on investors' behalf. One of the key issues to be resolved is whether the depositary should be fully independent of the fund manager.

The key difference between a domestic Oeic and the offshore versions of Oeics that already exist is that investors will be protected by the Investors Compensation Scheme.

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