At the beginning of 1997, open-ended investment companies were finally made available to the UK market. Now preferably known, by the FSA at least, as investment companies with variable capital (ICVC), they were much heralded as the new era of investment vehicles. Four years on, what has become of the Oeic and what is the prognosis for this wunderkind?
At launch, Oeics were praised for a number of new and useful facets including single-pricing, multi-share class structure, multi-currency and corporate structure. Single-pricing was at the vanguard of this new array of benefits. It was widely reported that dual-pricing structures with their bid/offer spreads were hugely confusing for investors and that the simple single price would sweep away confusion. It is fair to say this has not happened.
The stamp duty moratorium on conversions of unit trusts to Oeics was supposed to encourage fund management companies to convert their ranges. At the start of 1999, the number of groups that had converted was impressive. A full conversion from unit trusts to Oeics is no mean task and, while the stamp duty cost would have been a massive barrier, there are other significant hurdles in terms of cost justification and customer communication to overcome.
A multi-share class structure can be a material benefit but probably more for the fund management company than the customer. It allows groups to be more efficient in the operational management of the business and to tailor pricing to different customer groups. But there is no major evidence yet that these efficiencies have fed through to lower total expense ratios (TER) on Oeics as opposed to unit trusts.
Multi-share class structures do allow groups to develop innovative pricing structures but for onshore funds there has been little development of this aspect.
European integration of fund structures, either through merger or cross-border marketing, was to be facilitated by the use of a corporate structure for the vehicle rather than the trust structure. However, as with single-pricing, there are probably more material drivers behind the investment decision of a customer or adviser.
It seemed in 1997 that the Government wanted to encourage conversions of unit trusts to Oeics. It now seems as if the tide has turned the other way. In the future, unit trusts will have to be single-priced and there is increasing talk of allowing multi-class unit trusts.
This is to be welcomed from one perspective in that it creates a level playing field although this assumes there was a significant disadvantage to either customer, adviser or fund management company from the current situation. However, from another perspective, it is slightly baffling.
There is no doubt that multi-class structures can provide customer benefit through the creation of smart pricing structures. It still has to be the case that the long-term objective for any move to a different structure must be cost reduction for the fund management company and eventually the customer. These latest moves to equalise structures between Oeics and unit trusts would appear to be directing effort in the wrong place.
Cost reduction and, therefore, TER reduction will come from creating economies of scale deriving from the pooling of significant amounts of assets, not just a billion here and there but multi-billions.
Increasingly, tax harmonisation is occurring on savings within Europe. The rules on investments that can be held within Isas and Peps are also being harmonised. In essence, there are fewer reasons why offshore-domiciled funds, particularly from Luxemburg and Dublin, cannot be marketed alongside mainstream UK-domiciled funds. If European markets can accept funds from a single domicile, surely this is where the real benefit will come in the medium term?
As far as I am aware, there is only one example of a Luxemburg/UK fund merger. However, there are groups that have, over time, launched funds from the UK, Channel Islands, Luxemburg and so on. It is at this level that regulatory and tax resources should be focused. The need is to create the same environment for unit trust to Oeic mergers as exists in the UK throughout Europe.
The small basis point improvements to TERs that can be harnessed from operational cost savings can then be multiplied across the billions of pounds under management to make a more compelling case for merger than has been possible in the UK alone.
The Oeic or ICVC does have some benefits over the unit trust – the trouble is these benefits have not been material to customers or advisers and the benefits have only been of benefit to some fund management companies. Most big retail fund management groups have still not converted and this is not for lack of investigation. The need to look to a broader European justification is increasing.