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OEICs & Unit Trusts
Open Ended Investment Companies (OEICs) are generally seen as the ‘successors’ to old style unit trusts. A number of unit trust houses have already converted their former unit trusts to OEICs and this seems to be a growing trend. As the name suggests, OEICs, like unit trusts, are open ended, expanding and contracting on demand as investors invest or withdraw their funds. Instead of issuing units however, OEICs issue shares and have the option of listing on the stock exchange like Investment Trusts. Unlike Investment Trusts however, the share price of OEICs reflects the net asset value of the fund. OEICs cannot trade at a discount or premium to net asset value.
OEICs are valued daily and a single price is quoted for buyers and sellers alike, unlike unit trusts which quote a bid price to sellers of units and a higher, offer price, to buyers. Charges are shown separately. Whilst this does not automatically mean that OEICs represent better value than unit trusts for the investing public, it does mean that the charging structure is more transparent.
The benefits of investing in OEICs are broadly the same as for unit trusts:
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Professional investment research and management is made affordable for even the smallest investor
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Risk is spread over dozens or even hundreds of different holdings within the fund, each investor effectively owning a small proportion of each
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Economies of scale cut dealing costs when holdings are bought and sold
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The wide range of product providers and funds means that managers compete strenuously to attract new business by earning the best possible returns for their investors
Additionally, OEICs being companies rather than trusts, no Trustee is required, which makes for a small saving in terms of administration costs. In short then, by investing in an OEIC you reduce risk by spreading your investment and at the same time obtain professional investment management at low cost.
OEICs have the facility to operate as ‘umbrella funds’ where only one OEIC actually exists but whereby sub-funds are created within the structure. One OEIC may, for example, have UK, European, American and Japanese sub funds and investors may sell units of one sub fund and buy those of another, minimising dealing costs. Switches between sub funds are likely to prove cheaper than switches between different unit trusts managed by the same unit trust house. It should be noted however that the sale of units of an OEIC sub fund constitutes a disposal for Capital Gains Tax purposes just as would the sale of units in a unit trust.
Income from unit trust / OEIC holdings, whether distributed or not, is taken into account when calculating taxable income. The 10% tax credit on net dividends means that basic and lower rate taxpayers have no further tax to pay unless the dividend received takes their income into the higher rate tax bracket. Prior to April 1999 non-taxpayers could reclaim the tax credit on dividends but that reclaim is no longer allowed, only PEP and ISA managers benefit from the 10% tax credit.
Higher rate taxpayers are liable to tax on the net dividend at the special rate of 32.5%. Where an income payment from a unit trust / OEIC is classed as interest however, for example where it is paid from a gilt or corporate bond fund, the 20% tax credit is still reclaimable by non-taxpayers as well as by PEP and ISA managers.
Although capital gains made on the disposal of Unit Trust / OEIC holdings are subject to capital gains tax, the fund itself does not pay tax on any capital gains. This means that you are able to utilise your own capital gains tax exemption. With appropriate advice therefore, it is likely that you will be able to avoid this tax altogether.
In short then, by investing in an OEIC you reduce risk by spreading your investment and at the same time obtain professional investment management at low cost.
