An open-ended investment company (OEIC) is a type of investment fund domiciled in the United Kingdom that is structured as a company to invest in stocks and other securities. These shares are generally not traded on public exchanges. The price of OEIC shares is largely determined by the underlying assets of the fund. These funds can incorporate a blend of investment strategies such as income and growth, small cap and large cap, and can frequently adapt their investment criteria and fund size.
OEICs are termed “open-ended” because they can continuously create new shares to meet investor demand and cancel shares when investors exit the fund. OEICs are regulated by the Financial Conduct Authority (FCA), which provides safeguards like the Financial Ombudsman service.
Key Insights
- An open-ended investment company (OEIC) in the UK is similar to an open-ended mutual fund in the U.S.
- They offer a professionally managed portfolio of pooled investor funds invested in varied securities, including equities and bonds.
- OEICs are priced daily, based on their net asset value (NAV).
- They usually carry sales charges and annual management fees, known as the ongoing charges figure (OCF).
Unveiling the Mechanics of Open-Ended Investment Companies (OEICs)
An OEIC pools investors’ money and diversifies it across a variety of investments like equities or fixed-interest securities to mitigate the risk of losing the investor’s principal. These funds can offer both growth and income potential and typically serve as a medium to long-term investment, often held for five to ten years or more.
Anyone in the UK, aged 18 or above, can invest in a range of funds managed by industry experts. There are diverse levels of risk available that allow for capital growth, income generation, or a blend of both. These investments can also be held on behalf of minors, with ownership transferring directly to them once they turn 18.
Charges for OEIC Shares
Investors usually pay an initial charge ranging from 0% to 5% upon purchasing new shares, which acts as a front-end load diminishing the funds allocated for share purchases. Additionally, an annual management charge (AMC) of approximately 1% to 1.5% of the value of an investor’s shares is applied, covering fund manager services. Index trackers and passively managed funds are usually less expensive.
Most funds quote a total expense ratio (TER) or an ongoing charges figure (OCF), which includes the AMC plus other associated costs for product comparison purposes. Note that dealer charges, which increase annual costs for high-turnover funds, aren’t included.
There may also be exit charges on selling shares based on a percentage of the sale value, although many OEICs don’t enforce these fees.
Investing in OEICs
OEICs are ideal for investors lacking the time or expertise to manage investments actively. One-time or regular monthly investments with stipulated minimum amounts are typical. Access to funds is broadly straightforward online or via phone. Movement between funds usually incurs a fee.
Benefits:
- Professional money management
- Portfolio diversification to mitigate risk
- High liquidity
- Low investment minimums
Drawbacks:
- High annual fees and sales charges
- Tax implications
- Requirement for cash reserves, impacting returns
- Needs mid-to-long-term investment horizon
OEICs are not inherently tax-advantaged—interest and dividends are taxable, and selling shares may attract capital gains tax, but these must surpass tax allowances. However, OEICs can be held tax-free within UK-approved Individual Savings Accounts (ISAs) or pension plans.
Investment value and income aren’t guaranteed—they can fluctuate based on performance and foreign market currency rates, which might result in less than the initial investment.
U.S. residents can’t hold OEIC shares. Existing U.S. shareholders must divest or transfer ownership to UK residents.
OEICs vs. Unit Trusts: Spotting the Differences
Both OEICs and unit trusts (UTs) are prevalent investment fund structures in the UK, sharing broad similarities. Both have open-ended formats with investment managers at the helm who select securities. The primary difference is in pricing: unit trusts have two prices—the bid price for units sold back and the offer price for new units, whereas OEICs have a single daily price based on NAV. OEICs generally have lower fees due to more straightforward structuring, prompting many unit trusts to convert to OEICs.
A Real-World Case Study of OEICs
British OEICs can be compared to U.S. mutual funds. A pertinent example is Fidelity International, an overseas branch of Fidelity Investments. In July 2018, the branch introduced variable management fees for five UK-domiciled OEICs: Fidelity Special Situations, Fidelity European, Fidelity Asian Dividend, Fidelity Global Special Situations, and Fidelity American funds. This adjustment effectively decreased the base AMC by 10%.
Please note, as a factual correctness, shares of OEICs do not trade on the London Stock Exchange.
Related Terms: Unit Trusts, Net Asset Value, FCA regulation, mutual funds, individual savings account.
References
- Money. “What Are OEICs”.
- Gov.UK. “Individual Savings Accounts”.
- Gov.UK. “CG41562—Open-Ended Investment Companies (OEICs): S12006/964”.
- The Chartered Institute for Securities & Investment. “CISI—Financial Products, Markets & Services”, Pages 6 and 13.
- FT Adviser. “Fidelity Introduces Variable Management Fee on OEICs”.
