The rise and rise of Oeics

Big investment houses are abandoning unit trusts in favour of open-ended investment companies
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The Independent Online

The popularity of open-ended investment companies (Oeics) is growing. Launched at the beginning of 1997, they were slow to become established. But now about 30 per cent of fund management houses, including Fidelity, Threadneedle, Henderson, M&G and Credit Suisse Asset Management (CSAM), offer Oeics to investors instead of unit trusts. Last week, HSBC converted its fund range into Oeics.

The popularity of open-ended investment companies (Oeics) is growing. Launched at the beginning of 1997, they were slow to become established. But now about 30 per cent of fund management houses, including Fidelity, Threadneedle, Henderson, M&G and Credit Suisse Asset Management (CSAM), offer Oeics to investors instead of unit trusts. Last week, HSBC converted its fund range into Oeics.

So what are these Oeics that are replacing traditional unit trusts? The Association of Unit Trusts and Investment Funds (Autif) describes an Oeic as "a modern version of the unit trust". In fact, it is a hybrid of a unit and an investment trust. Like investment trusts, Oeics hold shares rather than units. But unlike investment trusts they are open-ended so there is no cut-off point; this means there is no limit on the amount of money a fund manager can accept into an Oeic.

Oeics are like an umbrella fund - within one Oeic you can have numerous sub-funds. CSAM converted to Oeics in April; it offers three - international, growth and income. Within these umbrellas, there is the option of investing in different funds, and as more funds are launched, they can be added to your Oeic. "It's like adding another coat to a coat hanger," explains Ian Chimes, managing director at CSAM.

The main difference between Oeics and unit trusts is the single pricing structure. With single pricing, there is just one price for investors and those selling their holding. The dual pricing structure of unit and investment trusts is less transparent. Rather than having one price, there are different buying and selling prices, which take into account managers' charges and adviser commissions. The single pricing structure brings Oeics into line with the European system of pricing. Consequently, it is much more straightforward for UK investment houses to market their products abroad.

"The single pricing structure is one of the most important aspects of Oeics," says Mr Chimes. "Trying to understand the previous way of pricing was confusing."

But not everyone agrees. Jupiter has chosen not to convert its unit trusts into Oeics. "We can see no advantages to investors in converting from a unit trust to an Oeic," says Steve Glynn, joint managing director at Jupiter. "The single pricing system is a bit of a misnomer. Theoretically it does sound good ... but in reality the fund manager has the right to move the single price so the investor may not get the price they've seen quoted."

Threadneedle, which was the first investment house to switch to Oeics, disagrees. Richard Eats, Threadneedle's communications director, believes one of the reasons other fund management houses have been slow to convert is that the dual-pricing structure allows greater margins on unit trusts.

However, the Financial Services Authority (FSA) is going to make single pricing mandatory, and Mr Eats believes this will lead to more managers converting to Oeics. And when the range of Oeics is extended next summer, to include cash, funds of funds, and futures and options, they are likely to become even more popular.

This doesn't necessarily herald the demise of the unit trust. Jupiter concentrates on the UK rather than Europe, so sees no need to switch. For those wanting to enter or target Europe, though, Oeics are a better investment vehicle, as Threadneedle has realised.

For those investors who are confused by the terminology, remember it is not the vehicle you invest in that is important but, rather, its performance.

In a warning to fund management houses thinking of jumping on the Oeic bandwagon, Alan Gadd, head of savings at HSBC, says the majority of investors won't switch funds for this reason. "Most people, if they are happy with performance, will support the conversion," he says. "Those who take their money out tend to have either a change in investment objective, so the fund is no longer suitable, or do so because the fund has been under- performing."

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