Meet oik, a smart financial operator

UNIT AND INVESTMENT TRUSTS A cheap and flexible fund is on its way. Neil Baker reports

From the start of next year pooling funds to spread risk and reduce costs should be cheaper and more flexible. If all goes to plan the big financial institutions that now sell unit trusts will be able to offer a new product from January - open ended investment companies, known as Oeics.

An Oeic (pronounced "oik") is a hybrid combining the best aspects of unit trusts and investment trust companies. The Association of Unit Trusts and Investment Funds believes that, in the not too distant future, Oeics will become the pooled investment product of choice.

Technically an Oeic is an investment fund of variable size in a corporate form. Its sole function is to own investments in the form of stocks and shares, gilts, corporate bonds and cash.

Oeic shares will be priced daily at net asset value (NAV) to reflect the market value of the fund's investments. That means investors will not have to worry about the discount problems that effect investment trust companies. Sometimes investment trust shares do not fully reflect the value of the shares the trust holds; the so-called discount on the NAV is a source of worry.

The difference between the bid price, quoted to investors who want to sell unit trusts, and the offer price, quoted to investors who want to buy, can be confusing. But Oeic shares will be "single priced"; the share price quoted at a particular time will be the same, regardless of whether you are buying or selling. Oeic managers will have to buy or sell shares or units, whenever requested by investors.

Oeics are like unit trusts in many ways but because they are legally a corporate body they will be easier to operate. With different classes of shares on offer, perhaps with varying levels of income or capital growth, and rules designed to give the managers more flexibility when arranging products, Oeics will also be able to offer investors increased choice. Managers will have more flexibility in deciding how to charge their fees, too, which should help them tailor products to investors' needs.

Further, the rules should make it easier for managers to structure their funds to make it cheaper and easier for investors to switch between different funds if their investment preferences and objectives change.

The government and the investment establishment are keen to see Oeics succeed. One of the reasons they are being introduced is that many of their attractions are available to offshore investors. Greater flexibility, single pricing and easy switching between funds, is already offered by UK institutions that have set up shop in centres such as Dublin and Luxembourg. These offshore havens have been taking investment business away from Britain.

The country has also lost out in the past because the most popular vehicle for pooled investment in the UK, the unit trust, has not made much sense to European investors.

UK institutions are now able to sell investment products throughout Europe and the hope is that Continental investors will feel comfortable with Oeics. If the final regulatory hurdles are cleared on schedule institutions will be able to set up Oeics from 6 January. The extent to which they offer a good deal for investors will, of course, depend on the level of competition.

The administrative savings from operating larger, European-wide funds under a simpler framework can be passed on to investors in the form of better returns or lower costs ... or they could just bolster the fund managers' profits.