"Do we launch an Oeic or a unit trust?" is a question which has crossed the minds of investment mana...
"Do we launch an Oeic or a unit trust?" is a question which has crossed the minds of investment managers and marketers many times in the last few years and which will continue to do so.
Apparent simplicity, greater markets in which to distribute, flexibility, and pricing all add to the feeling that Oeics are the way ahead, but many investment managers have changed their minds once they have talked to a fund administrator.
Why, what is the problem? In short, they may be too transparent for some markets. However, this does not do the question justice. There are ideal markets for Oeics and when it comes to launching an Oeic, there are experienced administrators to help. For those in major investment houses, administrators will be aware of the issues. They will have the resources and systems to provide pricing, dealing and registration, but for smaller or specialist investment management companies, the situation may be very different.
When it comes to launching a new open-ended fund, one's checklist will usually start with an assessment of the demand for the product, its distribution, the opportunities within the product's portfolio, and how you are going to manage the fund. Next will come the administrator and trustee (in the case of unit trusts), or depositary in the case of Oeics. Normally such a market-focused approach is desirable, however, today with the advent of Oeics and their additional flexibility and complexity, early understanding of administration issues may be more valuable. This thinking has already resulted in managers intending to launch Oeics changing their minds and concentrating on unit trusts instead.
From a layman's point of view, and starting with a clean sheet of paper, Oeics are probably easier to understand than unit trusts. Certainly it appears the notion of a single price has a far wider market appeal than a bid/offer spread. Oeics offer retail markets beyond the UK, flexibility of pricing and simplicity, but for some investment management companies to set up systems to deal with Oeics may not be a viable option. The impending Oeics 2 regulations may also serve as a temporal deterrent.
The key is in setting up an Oeic appropriately. Do you want a board of directors or an appointed corporate director and if you choose a board, who will serve? The norm is to appoint an appointed corporate director (ACD). From an administrator's point of view, there is a need for additional procedural requirements if appointing a board to ensure information flows and keep the independent directors informed of events.
In essence much of the administration of an Oeic is the same as a unit trust: creations, liquidations, and dealing with demand. But for managers new to Oeics there is a terminology hangover from unit trusts and the administrator often finds himself in a tutor's role. Mid-pricing, the ease of understanding a sales charge and the ability to tailor share classes to specific needs are the primary benefits that drive the decision to set up Oeics, but there are several key issues that create problems:
It is often difficult to explain the concept and implementation of dilution levy as it is frequently perceived as an additional sales charge. In reality the levy is required to protect the interests of existing shareholders in the Oeic. The ACD must establish the rate of dilution levy and agree with the administrators the circumstances in which it will be applied. The charge must be fair and reasonable to existing shareholders; however, there may well be marketing implications when implementing a dilution levy charge on large new entrants to the fund.
The pricing system is another key administration consideration. The administrator must, amongst other things, adapt the pricing functionality so as to value the portfolio at mid-market value as opposed to the traditional unit trust dual-pricing method.
The real complications arise when there are multiple share classes within a sub-fund. For two share classes within a sub-fund, all the expenses are evaluated on the basis of the relative value of those shares.
For example, where "A" shares have a management charge of 0.5% and "B" shares have a management charge of 1.0%. At each valuation point, charges must be allocated accordingly.
Accruals for the funds expenses must also be made at each valuation point and charged to the relevant share class in proportion to the relative assets within each class. These factors result in an immediate divergence of the asset value and therefore the price. Explaining this to shareholders of "B" shares can be difficult.
Another complication which may give the manager presentational difficulties is that certain expenses may be split on the basis of shareholder numbers or even to a single share class, for example the cost of a class meeting.
Analysis will show that after time, when the NAVs of each class diverge significantly, one share class will effectively have greater rights to the same portfolio than the other. The requirement under the reporting rules is that all classes of the sub-fund are shown together. Once again this may tax the investor relations department more than the administrators.
Oeics are yet to have a statement of recommended accounting practice (SORP). As a result, different audit firms may suggest different interpretations on how the consolidated Oeic accounts and the results of each sub-fund are presented. The manager will have to consider how it wishes to present the funds. A third party administrator will deal with a variety of audit firms and can over time assess the consensus view.
Contract notes should be simple however, consideration needs be given to presentation of the sales cha
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