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Bright future for Oeics

The market share of Oeics has been quietly building since the first was offered almost five years ago. They now account for 37 per cent of industry funds under management compared with 27 per cent a year ago. Now is an appropriate time to reflect on what they can offer the investor.

Aside from the FSA now calling these vehicles investment companies with variable capital (ICVCs), there is little that has actually changed in relation to Oeics themselves.

They are often portrayed as the modern fund structure of choice, with unit trusts being rather archaic, outdated vehicles. This is a rather simplistic view of the real differences between the two. There are three main areas where Oeics are deemed to have the edge.

Multiclass flexibility

Regulations permit an unlimited number of share classes in a single fund. This makes it easier to accommodate investors with different pricing requirements. Fund managers can therefore more effectively target different distribution channels with the same fund.

Forthcoming changes in polarisation will make this flexibility increasingly useful. There was talk sometime ago that the FSA would consider introducing similar flexibility for unit trusts. Current FSA priorities mean that this development appears to be on hold for the foreseeable future.

International marketability

The corporate structure of an Oeic makes it more akin to a Luxemburg Sicav. Theoretically, a UK Oeic is more marketable than a unit trust across Europe and beyond. In practice, two significant factors mean few groups have made a serious push at marketing Oeics outside the UK.

Many managers have established ranges of funds in Dublin or Luxemburg and would be reluctant to switch elsewhere.

Also, there is a widely held perception that the UK is a less stable tax environment relative to other fund centres – the withdrawal of the tax credit on dividends a couple of years ago is a good example of this.

Accountants might argue over the minutiae of the differing tax treatment of funds in the UK relative to those domiciled offshore but perception is all-important. The UK still has, at best, a question mark over it in relation to tax.

Single-pricing

When Oeics were first produced they were the only vehicle that offered a single-price environment. Unit trusts can now be single-priced at the behest of the manager, although typically they have not adopted this approach. Accordingly, single-pricing is still a perceived benefit of the Oeic structure.

The relative merits of different pricing regimes have been much debated, along with involved discussions on the use of dilution levies. With a view to creating consistency across unit trusts and Oeics, the FSA had been talking of a unified, compulsory single-priced regime for both.

However, it now appears possible that, although the pricing regimes will be combined, we are unlikely to see the introduction of compulsory single-pricing. The FSA issued a discussion paper on the new regime last October, which is due to be followed by a full consultation paper this year.

Unit trusts and Oeics differ in a couple of other areas which are worth mentioning.

AGM

The corporate structure of an Oeic means there is a requirement for an AGM. In practice, most groups treat this as little more than a formality, with few shareholders attending. The corporate structure also creates a need for directors, although there is the option to have a single corporate director, which is most common.

Contagion

The term is scary but this is extremely unlikely ever to be an issue. Theoretically, because all the sub-funds of an Oeic are part of the same company, if one sub-fund were to become insolvent the others would be liable to its creditors.

It is hard to imagine how a subfund could become insolvent without uncovered exposure to derivatives – this is strictly controlled by the FSA (and policed by fund managers&#39 compliance departments and a fund&#39s depositary). To my knowledge no UK authorised fund, unit trust or Oeic has ever become insolvent.

The distinction between unit trusts and Oeics is not perhaps as great as first imagined. Certainly the differences are not sufficiently material to make them a factor in fund selection – quality of manager, investment process and performance should remain paramount in this respect.

However, the flexibility Oeics offer in respect of multiple share classes is such that we will see a continuation of the steady shift to Oeics over time.

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