What is an OEIC?
An Open-Ended Investment Company (OEIC) is an investment fund that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. Designed to offer flexibility, transparency, and professional management, OEICs are an attractive option for both novice and experienced investors.
The legal concept of the Open-Ended Investment Company (OEIC) was created in the United Kingdom where it is governed by the Open-Ended Investment Company Regulations 2001. Since the new rules came into effect, the OEIC has become the preferred legal form for new open-ended investment (as opposed to the older unit trust).
The open-ended nature of the OEIC means that the manager must create new fund shares when someone wants to invest in the fund. The OEIC will also redeem shares upon the request of a shareholder.
What is an ICVC?
In the UK, the terms OEIC and ICVC are used interchangeably by investment managers.
OEIC = Open-Ended Investment Company
ICVC = Investment Company With Variable Capital
Alternatives outside of the United Kingdom
The OEIC / ICVC is similar (but not identical) to the U.S. Mutual Fund and the European Société d’investissement à capital variable (SICAV).
Understanding the background
In the United Kingdom, unit trusts were established in the 1930s and became favoured legal vehicles for investment. In the 1990s, experts began to argue that UK lawmakers should permit a corportate form that could repurchase its own shares without having to adhere to the standard restrictions of the Companies Act. Eventually, this became a reality.
- The Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations 1996 introduced the OEIC on 11 November 1996 and came into force on 6 January 1997. Back then, the United Kingdom was a part of the European Union and the new regulations were enacted under the European Communities Act 1972 section 2(1).
- The Securities and Investment Board regulations for the Financial Services Open-Ended Investment Companies Regulations 1997 were approved by the SIB Board on 16 January 1997 and came into effect on that date.
- The first commercial OEIC was established by Threadneedle Asset Management in 1997.
This was before the single-regulator FSA had been created, and OEICs were therefore only permitted to invest in transferable securities, a stipulation that ensured that OEICs would always fall completely within the scope of the Undertakings for Collective Investment in Transferable Securities Directives (UCITS). When the FSA had been created, the old 1996 OEIC regulations were replaced by the Open-Ended Investment Companies Regulations 2001 (see the Financial Services and Markets Act 2000, section 262). OEICs were now within the scope of the FSA and the range of permitted assets became much wider than before. From this point, OEICs could for instance invest in property funds, money market funds, and funds of funds. This step removed some of the advantages of the old unit trusts and made OEICs increase in popularity among UK investors.
The Financial Conduct Authority (FCA) was established in 2013, largely taking over the responsibilities of the FSA when it comes to OEICs. It should be noted, however, that the Bank of England also have certain powers when it comes to large OEICs that are considered to be of systemic importance.
Key Features of OEICs
Investing in an OEIC can be a smart way to achieve diversification, professional management, and potential growth in your investment portfolio. By understanding the features, benefits, and considerations associated with OEICs, you can make informed decisions that align with your financial goals and risk tolerance. Conduct thorough research and consider seeking advice from financial professionals to optimize your investment strategy.
Here is some brief information about OEIC key features that are imporant to understand before making any decisions.
Open-Ended Structure
The key feature of an OEIC is its open-ended structure, meaning the number of shares in the fund can increase or decrease based on investor demand. This structure ensures liquidity, allowing investors to buy and sell shares at any time based on the current net asset value (NAV).
The fund is equitably divided into shares and these shares will vary in price as the fund´s net asset value (NAV) varies.
When the fund manager has created new shares for an investor, those shares are sold to the investor at the prevailing share price.
Since new shares will be created as soon as there is a demand for shares, there is no demand-supply dynamic that can bring the share price up over their proportional value based on the underlying assets. The share price is always a reflection of the value of the underlying assets.
Single-priced vs. dual-priced OEICs:
- With a single-priced OEIC, shares are bought (redeemed) and sold at the time price.
- Wih a dual-priced OEIC, there is one buy-price (redeem price) and another sell-price, and the difference between them is the bid-offer spread.
Diversification
OEICs offer diversification by investing in a broad range of assets, which helps reduce risk by spreading investments across various securities, sectors, and geographies. This diversification is managed by professional fund managers who use their expertise to select and manage the fund’s portfolio, conducting thorough research and analysis to identify investment opportunities and manage risks.
An OEIC can be an umbrella fund, i.e. it can hold various sub-funds that each have their own investment goals, methods and risk levels.
Transparency
Transparency is another hallmark of OEICs, with regular updates on fund performance, holdings, and fees provided to investors. UK OEICs are regulated by the Financial Conduct Authority (FCA), ensuring they operate within established guidelines to protect investor interests.
Legal structure
Most OEICs have a Board of Directors headed by the Authorised Corporate Director (ACD). In the UK, the ACD firm must be authorised by the FCA. Examples of board responsibilities: managing the investments, selling and redeeming shares, ensuring correct pricing of shares, handling day-to-day operations. The ACD is in control of the board.
The depositary is a firm (normally a bank) that holds legal title to the OEIC´s investments. The depositary is an independent entity and must be authorised by the FCA. It does not operate under the OEIC board or ACD. The depositary is responsible for safekeeping the instruments etc that constitutes the OEICs investment portfolio. The depositary is also legally required to take reasonable care to ensure that the ACD complies with the regulations.
Benefits of Investing in an OEIC
Accessibility
Investing in an OEIC offers several benefits. They are highly accessible, and many of them have a relatively low minimum investment requirements and a simplified investment process. Investors can purchase shares through financial advisors, brokerages, or directly from the fund company.
Cost-effective
OEICs are cost-effective and often having lower management fees compared to other types of investment funds like unit trusts. Of course, it is important to always research the particular fund you are interested in.
OEICs without any bid-ask spread are popular among investors seeking to keep trading costs down.
Income and growth potential
OEICs can provide regular income through dividends or interest payments from the underlying investments, while also offering potential for capital growth if the value of the fund’s investments increases over time.
If regular income is important to the investor, it is necessary to select an OEIC that have this investment angle.
Flexibility and choice
The wide range of funds available, with different investment strategies, asset classes, and risk levels, allows investors to choose funds that align with their financial goals. Additionally, investors can switch between different funds within the same OEIC family without incurring significant costs.
Considerations before investing
Risk Tolerance
Before investing in an OEIC, it is important to consider your risk tolerance. Understand your comfort level with market volatility and potential losses, and ensure the OEIC provides adequate diversification to spread risk.
Note: Loss is always a risk when investing, even for low-risk investments. Carry out suitable diversification to reduce risk. Even if an OEIC holds a highly diversified portfolio, putting all your capital into one single OEIC increases risk.
Investment Objectives
Define your investment objectives, clarifying whether your goals are focused on income generation, capital growth, or a combination of both. Consider your investment time horizon and choose OEICs that align with your long-term financial plans.
Costs and Fees
Review the management fees and other costs associated with the OEIC to understand their impact on your returns, and compare expense ratios of different OEICs to ensure you are getting value for your investment.
Fund Performance
Compare the OEIC’s performance against relevant benchmarks to gauge its relative success. Evaluate the fund’s historical performance, but also keep in mind that past performance is not any guarantee of future results.
Tax Considerations
Understand the tax implications of investing in an OEIC, including any potential tax benefits or liabilities. Consider investing through tax-efficient vehicles like Individual Savings Accounts (ISAs) or Self-Invested Personal Pensions (SIPPs) to maximize tax advantages.
How to invest in an OEIC
Research and Selection
Start by identifying funds that meet your investment criteria through financial websites, fund prospectuses, and advice from financial advisors. Compare different OEICs based on their performance, fees, management, and investment strategies.
Open an Account
Open an account with a brokerage firm or directly with the fund company offering the OEIC, completing the required documentation, including identity verification and investment details.
Purchase Shares
Determine the amount you want to invest and purchase shares in the selected OEIC. Consider setting up regular investments to benefit from dollar-cost averaging and compound growth over time.
Monitor and Review
Regularly monitor the performance of your OEIC investment and review fund reports, making adjustments to your investment strategy based on changes in your financial goals, market conditions, or personal circumstances.