Now unit trusts can be converted into an open-ended investment company, fund managers are weighing u...
Now unit trusts can be converted into an open-ended investment company, fund managers are weighing up the pros and cons of the new system. Mike Mumford poses the question, to Oeic or not?
Fund management houses have been contemplating recently whether to Oeic or not. The conversion of unit trusts to open-ended investment companies (Oeics) is a decision that has advantages and disadvantages for clients, advisers and fund management companies alike.
AXA Sun Life has just completed its first Oeic conversion changing and merging 12 UK investing unit trusts into a UK Oeic with six sub funds. It is now in the process of merging and converting a further 12 overseas unit trusts into a global Oeic.
There was a perception among many at the time that we were changing something that most understood to be something that is new and a highly complicated investment vehicle. It was felt that advisers would not understand the product and therefore clients would have no chance. On investigation, nothing could be farther from the truth.
Before Oeics were introduced in the UK there was a mismatch of collective investments on offer in the UK and those available in mainland Europe. The use of trust law by unit trusts and bid-offer spreads are largely unknown by European civil law. The introduction of Oeics together with the single pricing contained within them now puts UK collective investments on an equal footing with European equivalents.
Oeics have retained many of the features and attractions of unit trusts such as being open-ended and having a regulator to specify the acceptable investments. Both unit trusts and Oeics are exempt from tax on the capital gains made within the company and are charged at the corporate tax rate of 20% after deducting management and other administration charges. Also, stamp duty is paid by the investor on a purchase only.
The valuations on unit trust and Oeics are made daily, although some may be more than once a day. Oeics and unit trusts differ in legal structure with a unit trust defined as a legal trust governed by a trust deed and Oeics as a limited liability company.
The adoption of a company structure is more in line with our European counterparts and enables greater flexibility to be built in for the benefit of clients, advisers and the ACD and the Oeic.
Unit trusts are managed by a unit trust manager while Oeics are managed by directors, including an Authorised Corporate Director (ACD). Unit trusts offer only income and accumulation units while Oeics can offer different share classes subject to the approval of the FSA.
An independent trustee, who holds the assets and is legally responsible to the unit holder, oversees the unit trusts but Oeics are overseen by an independent depository who holds the assets or employs a third party to hold the assets. The ACD is responsible to the shareholder.
Dual pricing is used by unit trusts with a spread between buying and selling, including dealing costs and charges, while the Oeic has single pricing with dealing costs and charges shown separately.
Unit trust pricing reflects the valuation of assets in the portfolio with charges included in the bid-offer spread. Oeics' unit pricing reflects the valuation of assets in the portfolio with charges shown separately.
Each unit trust requires its own trust document, trustee and charging structure. This usually includes a bid-offer spread, and management charges that are set within the terms of the trust and cannot be varied without the agreement of the unitholders.
An Oeic is an umbrella company structure with one or more different sub funds. The Oeic structure gives a far more flexible approach for the product provider. Within the one company structure a range of sub-funds can be included and for each sub-fund a number of share classes may be made available. Accumulation and income shares can also be incorporated at sub-fund level if required.
However, despite the existence of the umbreIla structure, each sub-fund is treated as a separate entity for CGT purposes and a tax liability can occur on switches between sub funds. An example of how this may work is a UK Oeic with a range of growth, growth and income and income funds. Each fund then has two share classes, perhaps one with an initial charge and one without. These charging structures could also incorporate different commission shapes if required. Finally, some of the sub-funds could then offer income and accumulation shares.
Probably the most obvious difference between a unit trust and an Oeic is the pricing methods. Advisers and investors will be familiar with the traditional bid-offer spread that has featured unit trusts and other types of investments for many years.
The bid-offer spread enabled the costs or buying and selling units to be shared by all types of investor, regardless of size. There was a price at which you bought and a price at which you sold. Typically these were 5% to 6% apart but took full account of all of the potential costs of the transaction, including stamp duty and commission.
The advent of single pricing means that the client has the one price to consider and therefore value their investment at. The initial charge is declared upfront and the annual management charge is taken in the usual way. Thus the price reflects the value of the underlying assets and performance is not confused or blurred by charges.
Because of this open style of pricing there can be some instances where an investor with a large sum of money to invest or encash could incur significant dealing costs. If the fund bears these costs it is unfair to those investors who remain in the fund as these costs are deducted effectively from the performance of the fund.
Thus a new term for many has been introduced, th
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