The conversion of the UK's sprawling unit trust industry to the new Oeic structure has gradually bee...
The conversion of the UK's sprawling unit trust industry to the new Oeic structure has gradually been gathering momentum since the regulations were first introduced in 1997.
Global Asset Management was the first company to launch a full Oeic with its Japan Growth Fund which was quickly out of the blocks in May of 1997. Since then, the industry's progress has been somewhat piecemeal (see Table 1) with providers generally adopting the new corporate fund structure as new fund launches allow or else wait for the right time to convert their entire range of funds. In the majority of cases, this decision has been purely a commercial one based on the costs of making the changes necessary and introducing the highly expensive systems needed to support the administration of the new fund structures.
As Dominic Sheridan, director of operations for RSA Investments' unit trust and Oeic business explains: "So far the conversion process has cost the company somewhere in the region of £750,000 and we have only converted 17 of the 20 funds that currently make up the range."
Raising the flag
The problem for most providers is that although the Oeic regulations were introduced to put UK-based funds on the same footing as their European Ucits counterparts, and by extension allow them to be marketed directly into Europe, 1997 only saw regulations which allowed authorised securities and warrants funds to be launched in Oeic form.
The regulations which would allow non-Ucits funds such as money market, futures and options, fund of funds and property funds to convert to Oeic status (the Oeic 2 regulations) are still not expected to arrive until the summer of next year when they will be incorporated into the Financial Services and Markets Bill. This has caused particular difficulty for those managers who wish to offer a cash Isa as part of their product range because to do so under the current rules still requires a unit trust structure.
Although this is a relatively isolated example, the fact that we are still awaiting the Oeic 2 rules, which were originally expected to follow shortly after the initial regulations, has meant that most fund managers have been caught between two stools when it comes to the timing of their fund conversions. Although the Oeic 2 regulations generally apply to more esoteric funds, managers are faced with the choice of either paying to meet the costs of introducing Oeic management systems while also having to maintain their existing unit trust systems, or of waiting until the appropriate legislation arrives to allow them to fully rationalise their internal management.
Even so, around a quarter of the industry has already moved ahead with Oeic conversions. As Dominic Sheridan explains: "As a company, we took the view that Oeics were the direction in which the wind was blowing because the umbrella structure lends itself so well to lifestyle investment and future product innovation. Although there is currently no direct competitive advantage when compared to unit trusts, we wanted to make sure that we kept up with the industry's early movers such as Threadneedle, Fidelity and Henderson."
A new tack?
Of course, the case for European investment into Oeics is compelling considering the maturity of the UK market and its high number of independent, non-banking related, fund managers and the Continent's growing equity culture. But although it is difficult to point to exact figures, there is little question that Oeic sales into Europe have been subdued to say the least. This is partly because most fund managers have been slow to market their wares into Europe during a period when the industry has been struggling to catch its breath following the arrival of the new Isa regime and Y2K and partly, as Clare Arbour of Autif explains, "because Oeics are still seen by Europeans as very much a British investment vehicle."
Dominic Sheridan says: "Most UK fund managers are concentrating their efforts on Sicavs at the moment which are still far better recognised by the average European and are not constrained by the Ucits rules. The success of RSA's link-up with the Italian Post Office is a good example of this trend."
Of the UK's fund managers only Threadneedle has yet to make significant inroads into Europe with investment from Germany, Austria, Belgium and Holland already standing at £1.2bn. But as Threadneedle's director of communications, Richard Eats, explains: "Our success so far has been a result of our willingness to change our business model. We closed down our existing Luxembourg Sicav operation and brought our entire operation in-house. We now re-package our funds for each of our markets which means catering for differences in language, tax reporting, charges, cooling off periods and currency conversions. This has meant much higher systems costs but has stopped us from duplicating costs by running an overseas operation."
Watering it down
Leaving aside the somewhat cool reception that Oeics have received in Europe, the more immediate question is how have they been holding up at home? The answer is extremely well. To the average retail investor not much has changed. Although the education process has hardly begun in real terms, the main differences between Oeics and their predecessors can probably be described as superficial as far as the average retail investor goes.
Part of the problem is the complexity of what are essentially the differences in accounting that arise from a corporate rather than a trust structure. These complexities have certainly been enough to deter all but the most tenacious members of the national press from taking up the topic. Rightly or wrongly, the main focus of the limited press attention that Oeics have received has
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress