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Will SGAM be last to tread the road to conversion?

SG Asset Management will this weekend become the latest company to convert its range of unit trusts into Oeics or ICVCs. The move, which is aimed to boost the group&#39s retail offering in the UK and Europe, will bring the number of Oeics in the market to around 1,200, far in excess of the 800 remaining unit trusts.

However, the conversion could be the last that the market will see as the FSA&#39s new rules for collective investment schemes level the playing field between unit trusts and Oeics.

SGAM says the conversion still makes sense for its business, with its huge European presence, but admits the rule changes have made the switch less appealing. Director Mik Bates says: “The advantages are less than when we started this exercise but the Oeic structure is better understood in Europe than it is in the UK. It fits better into our range across the group.”

SGAM believes only firms with European ambitions are likely to plump for the Oeic structure in future, given the expense and hassle involved. But few firms have made the switch in recent times, anyway, with Legg Mason and Invesco Perpetual being notable exceptions. Legg Mason, which converted last September, argues that the Oeic structure, regardless of subsequent changes to the unit trust rules, allows it more flexibility and improves its ability to provide new and innovative investment products.

This has certainly been the main driver behind most conversions but the subsequent changes to the collective investment scheme sourcebook have largely eroded the advantages of Oeics. Previously, the only way groups could offer single-pricing and multiple share classes was through the Oeic structure.

Under the new rules, both features are also available to unit trusts, meaning that different unit classes can be offered to investors. All firms with unit trusts agree this is a major benefit and affords them much greater flexibility with their product ranges.

Perhaps as important, single-pricing – banned under the previous rules for structures other than Oeics – can now be applied to unit trusts. Threadneedle says this move, in particular, has essentially ruled out any chance of the company converting its remaining unit trusts to Oeics.

Communications director Richard Eats says: “I do not think we can convince ourselves at the moment that there would be sufficient benefit to change. We can single-price now, which was always one of the main benefits of Oeics. We can think of no compelling commercial reason to convert.”

Dual-pricing will continue to be allowed, for the time being at least, as a consultation paper on compulsion to move to single-pricing is due in the coming weeks. This could potentially become a contentious issue as many groups have structured their businesses around dual-pricing and to switch to single-pricing, with its costs and complexities, is something many are keen to avoid.

There is also the question of charges, which the FSA&#39s new rules attempt to align. This is an important area as groups have clearly been taking advantage of the greater scope for additional charges, such as the cost of publishing share price, that the Oeic structure has afforded them.

According to the latest research from Fitzrovia, the average Oeic has a total expense ratio of 1.69 per cent compared with 1.57 per cent for the average unit trust – a major discrepancy in a low-return environment. Now the FSA has aligned the respective charges, however, there is little point in groups converting if one of their intentions is to apply additional charges to their funds.

Given the FSA&#39s comprehensive overhaul, are there any remaining incentives for groups to convert? According to some IFAs, the rule changes – or at least the knowledge of their impending implementation – have been deterring groups from switching for years.

Charcol Aitchison & Colegrave head of investment services David Thomson says: “Groups have known about the rule changes for a long time. I have known about them for around six years. I think the knowledge that they were coming stayed the hand of many groups which might otherwise have gone down the Oeic route. I know we thought the new rules would serve our needs.”

But not everyone believes we have seen the last Oeic conversion. Companies have been able to adopt the new rules for new and existing funds since last month but they will only become compulsory in February 2007. Some experts believe that only when this deadline looms larger will groups begin to seriously reassess their positions.

Credit Suisse Asset Management product development manager Toby Hogbin says: “For the purposes of simplicity, both for the investor and for the groups in terms of administration, a number may well want to convert. At some point we will have to. Every firm will be making an assessment of what they want their range to look like. Oeics or unit trusts will be a consideration.”

In two years, many groups may also have begun to widen their ambitions into Europe, which is a more natural environment for Oeics. But for the time being, the levelling of the playing field will ensure that few groups follow SGAM down the conversion route.

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