Sicavs, Oeics or traditional UK unit trusts? Investors in mutual funds will soon have a wider choice of domestic or international products

INVESTMENTS

For the first time ever the UK mutual fund industry will soon be able to market a standard investment product which it can sell in every country in Europe.If it succeeds it could open up a market six times the size of the UK.

Next July will see the expected launch of the first open-ended investment vehicle (Oeic) in the UK, 10 years after an EU directive set down a framework for the cross-border marketing of funds throughout the Community.

The essential difference between an Oeic and a unit trust is that shares in Oeics will have a single price for both purchases and sales, making them much more user-friendly.

They will be pooled investment vehicles operating in a similar way to unit trusts but with a corporate structure rather than one based on trust law. In this way Britain will be falling more into line with a structure that is fast becoming the norm in other markets.

Within the EU, for example, there are already close to 7,000 funds aimed at retail investors, up more than 25 per cent on a year ago. Some 4,000 of these are domestic funds authorised for sale only in their country of origin but at least 2,500 are registered as foreign funds and as such may be sold in at least one other country outside their domicile.

Luxembourg accounts for more than three-quarters of funds sold across EU borders. Frustrated by the slowness of the UK authorities in allowing investment products to be priced, packaged and taxed in a way that is more appealing to foreign as well as to domestic investors, the UK investment industry has been seeking its own remedies.

In the last few years several leading groups - Fidelity, Flemings and Templeton among them - have been steadily taking advantage of the options available in other centres. In Luxembourg, for example, Templeton has no fewer than 21 separate funds within its Global Strategy Sicav (Societe d'Investissement a Capital Variable).

These are open-ended investment funds - in other words they can attract new money at any time - which are already registered for sale in a number of other European countries, including the UK.

While tax advantages are regularly cited as one of the reasons fund management groups choose so-called offshore centres such as Luxembourg to extend their range of wares, the more potent explanation is that the fund industry has to become more global if it is to meet the burgeoning needs of the market.With Oeics London has a chance to catch up and exploit its management skills.

The pace of change is likely to result in the further dismantling of restrictions and a greater commonality in the rules governing investment in different countries. Just as we have seen a trend to freer trade in manufactured products, so we are likely to see the market for tradeable services like investment management open up.

It took 40 years for the motor industry to become truly global. A global fund industry with similar products sold throughout the world is in my view no more than 10 years away. And as that reality dawns so the remaining barriers that prevent this global trade at the moment - as much psychological as physical - will disappear. The result will be better, more cost-effective products.

My confidence is not confined to the strongly held belief that investors will demand greater choice. It recognises the increasing tendency, as people live longer and impose additional strain on national finances, for goverments to encourage them to save or invest more for their own retirement.

Mutual funds offer one of the most efficient ways of doing this, particularly if the investment scope of the funds is made as wide as possible, so minimising risk over the medium to long term.

The preference of investors to buy products from familiar domestic names is often seen as a reason why the fund industry will not globalise. But this has not been the case in other industries where the international firm has localised its product sufficiently in terms of language and service and the currency in which it is priced. Progressive fund companies are doing this already and with encouraging results.

It remains to be seen how many unit trusts will convert to Oeics. Those groups already offering a wide range of products through Sicavs - in addition to their existing unit trusts in the UK - may opt to wait and see how the new market develops.

This way they will be giving their investors the choice of remaining with the old-style unit trust or moving into the Sicavs. Others, particularly those less well established outside the UK, may be tempted to make the switch.

The Government has stated that the procedure for converting an existing unit trust to an Oeic will be relatively simple. Trust managers will ask unit holders to vote on the move and no tax penalties will be imposed. The deciding factor for some groups may be whether they wish to market shares in Europe where, of course, Oeics are the most common vehicle.

Either way, the UK Oeic can only add to the variety of investment products on offer, to the ultimate benefit of consumers and the eventual goal of a global investment market.

For the dynamics of the investment fund industry dictate that, in the not so long term, both funds that are domiciled in the UK and those that are not will be considered alike. Why set up clone funds in every market when it is more efficient to spread fixed costs, including investment management resources, by selling the same fund product in a number of markets?

Given the changes that are already taking place, we can look forward to a future in which the preference for domestically 'produced' investment funds disappears, and the more important attributes of product performance, image, and reputation for delivery, service and reliability combine to take pride of place.

Douglas Adams is marketing director of Templeton Investment Management Ltd.