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Open-Ended Investment Companies (OEICs)
What is an OEIC?
Each investor's contribution is pooled and invested on their behalf by the Authorised Corporate Director (ACD). OEICs offer increased flexibility and simplicity while retaining the tax structure enjoyed by unit trusts. Like unit trusts and investment trusts, OEICs offer investors: the opportunity to spread risk by increasing diversification to a number of stocks and shares; the advantage of professional investment management expertise; and a cost effective way of investing in the world stock markets.
Unit trusts have a buying (offer) price and a selling (bid) price. This dual pricing structure includes costs such as the manager's initial charges and dealing costs but these are not specified. The pricing of OEICs is much simpler. There is a single price, called net asset value (NAV), which is the same for both buyers and sellers. Any charges for buying and selling are detailed separately, meaning investors have a much better idea of what they are paying, and why, when they invest.
Structure
OEICs have a corporate structure and are similar to a company. The fund property (the stocks and shares) is held by one person (the depositary), on behalf of another person (the beneficiary), on agreed terms. The depositary has responsibility for safe-custody of the company's assets. However, it is the beneficiaries (the investors in the fund) who have the economic interest in the fund property.
An OEIC can have many divisions or sub-funds, each of which can invest in different areas with different investment objectives. So a single OEIC may contain separate sub-funds that invest in the UK, Europe, US, Emerging Markets and Corporate Bonds. To invest, you buy shares in the sub-fund of your choice from the ACD. This collection of sub-funds in the OEIC is called an Umbrella Scheme. You could look at the OEIC as a corporate ‘umbrella' under which all the sub-funds shelter. Within each sub-fund, there may be one or more share classes, for instance, which are denominated in different currencies.
ACD and Depositary
The depository safeguards the property and assets of the OEIC whilst the ACD operates the OEIC and, most significantly, makes all the investment decisions. The separation of management of the OEIC property from the possession and ownership of it is an elementary form of investor protection. As with unit trusts, the depositary has a duty of oversight.
Documents and Authorisation
The central document, which constitutes an OEIC, is the Instrument of Incorporation. This provides all the details as to how the OEIC will be operated and managed. The Prospectus forms an information document describing many of the characteristics of the individual OEIC.
The required contents for the Instrument of Incorporation and the Prospectus are laid down in the FSA's Collective Investment Scheme Sourcebook (COLL) and the Open-Ended Investment Companies Regulations 2001.
Authorisation for an OEIC is obtained by applying to the FSA (the regulatory body of the UK financial services industry). The application must be accompanied by drafts of the Instrument of Incorporation and Prospectus, plus various other items of information and the requisite fee. Authorisation is granted by the FSA issuing an Order of Authorisation. Once authorised, the OEIC can be promoted to the general public. The ACD must abide by prescriptive regulations when marketing CISs to the public.
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Disclaimer: The material and information contained on this website is provided for general information only. DATA does not provide any investment advice and you are recommended to obtain professional financial advice where appropriate.
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