The baby is growing up fast

Open-ended investment companies began life just three years ago but are so popular that many unit trusts are being converted to the new structure

Open-ended investment companies, or OEICs, are the babies of the mutual funds market. Unit trusts and investment trusts first appeared before World War II, but OEICs were introduced just three years ago by the Treasury.

Open-ended investment companies, or OEICs, are the babies of the mutual funds market. Unit trusts and investment trusts first appeared before World War II, but OEICs were introduced just three years ago by the Treasury.

But the number of OEICs is growing rapidly, with many fund management groups now opting to convert their unit trusts to the new structure. They say the benefits are worth the upheaval.

OEICs were devised to combine the best features of unit and investment trusts. They too are collective investment vehicles, where investors share in the performance of a large fund of stocks, shares and other investments. Like investment trusts, they are companies which issue shares, as opposed to unit trusts which issue units. But while investment trusts are listed on the stock exchange, OEICs are not.

In common with unit trusts, on the other hand, they are open-ended. This means they expand according to the demand for their shares. Because of this their shares can be bought and sold freely, and this avoids the problem experienced by investment trusts of the stock trading at a discount or premium to the net asset value (NAV) of the fund.

But from the investors' point of view, probably the best feature of the OEIC structure is one which is borrowed from neither forerunner. OEICs have a single price, rather than a bid-offer spread. "Though there may well be front-end charges levied on an OEIC when you first buy into it, investors may find the pricing easier to understand," says Anne McMeehan of the Association of Unit Trusts and Investment Funds.

The range of OEICs on offer nowadays is broad. Management groups which are marketing funds under this new structure include Threadneedle Investments, Fidelity and Henderson Investors.

Ms McMeehan says there are some real advantages for investment providers in offering OEICs rather than unit trusts. "They are a more modern, more flexible vehicle, which enables the fund manager to sell his product not just in the UK but in a recognised structure throughout Europe," she says. The trust structure for mutual funds is peculiarly Anglo-Saxon, she says.

Several unit trusts are in the process of changing into OEICs - a metamorphosis which requires the agreement of unitholders. Nearly 70,000 Henderson unit trust investors voted in favour of conversion this summer, and 35 of the management group's unit trusts have now become OEICs.

"We believe it is a simpler product for clients to understand," says Henderson's marketing manager Sarah Speake. "OEICs have single pricing, and they also have a much more flexible structure."

Different classes of share can be issued by one fund, which enables both institutional and retail investors to be catered for under the same roof. And retail investors can choose whether they are charged upon first investment or when they exit the fund.

HSBC Asset Management is set to convert all of its unit trusts into OEICs at the end of October, having asked 350,000 investors for their vote in September, and earlier this year Credit Suisse Asset Management transformed its entire unit trust range into OEICs.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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