Open-Ended Investment Companies (OEICs)

Open-Ended Investment Companies (OEICs) are a form of collective investment which have been authorized in the UK since 1996. OEICs were first launched in the UK in 1998. They compete with unit trusts and investment trusts. Some fund providers call their open ended investment companies an 'Investment Company with Variable Capital' (ICVC). To all intents and purposes these are identical to OEICs in structure.

OEICs and ICVCs are like unit trusts in that they are collective investments, pooling the resources of many investors to provide a fund for investment by professional fund managers:

Like unit trusts, they reduce investment risk through a wide spread of investments and cost-savings arising from economies of scale.
Unit trusts, OEICs and ICVCs are open-ended and have to dispose of assets in the event of there being more sellers than buyers of the fund.
OEICs and ICVCs did not originally have powers to invest in derivatives such as options or in property, but these powers are now provided under the Financial Services and Markets Act 2000.

Structurally, open-ended investment companies (including OEICs and ICVCs) are very different from unit trusts:

They are formed as limited liability companies.
Investors purchase them in the form of shares quoted on the stock market.
The shares are redeemable and normally trade at or near their net asset value (the value of the underlying investments divided by the number of shares in issue) with adjustments available to protect investors in the event of rapidly rising or collapsing investment markets.

Open-ended investment companies are governed by corporate law and not by British trust law:

Each OEIC must be run by a Board of Directors. There must be an authorized corporate director (ACD) responsible for fund management.
The board normally contains executive and independent directors and is subject to the rules of corporate governance.
The interests of investors are protected by the depository. This is the OEIC equivalent of a unit trust trustee, who must be independent of the ACD.
In addition to protecting the fund's assets, the depository has overall control of third parties, such as providers of investment advice, to whom the OEIC contracts-out work.

The tax treatment of open-ended investment company funds and their investors' proceeds is identical to that for unit trusts and investment trusts. The funds are subject to capital gains tax on disposals. The taxation of the income will depend on whether the trust is classed as a fixed interest or equity based investment. Funds with an underlying investment of more than 60% in fixed interest investments will be subject to savings tax on income distributions. Funds with less than 60% in fixed interest investments are classed as equity based and will be subject to dividend taxation on income distributions.

The OEIC structure is the Government's preferred form of collective fund and it has provided a number of incentives for the remaining unit trusts to convert by waiving the stamp duty that would normally be incurred on conversion.

Charges

A single price is quoted for buying and selling shares. An additional charge, called an initial charge, is levied to cover the commission payment to the intermediary (typically around 3%). Should the intermediary choose to forego part of their commission this initial charge may be reduced, usually by 1% for each 1% of commission given up.

Often the purchases and sales of shares (units) within a fund will balance each other out, so the units may simply be passed from the buyers to the sellers. Where there is an imbalance, units may have to he created or cancelled and there will be a cost involved in doing this.

For more information, please contact us.