What are Open Ended Investment Companies?

The finance industry is full of jargon, so the following are some commonly used terms to describe the types of Open Ended Investment Companies (OEIC’s) that are available as pooled or collective investments.

An OIEC is a Limited liability company governed by an instrument of incorporation. It has a board of directors, including a Financial Services Authority (FSA) Authorised Corporate Director (ACD) and its assets held by an FSA authorised independent depository. Similar to a Unit Trust it is managed and promoted by a professional investment manager who is the ACD. His role is to buys shares in different companies which are represented by the allocation of shares to investors.  

The OEIC’s investment manager (ACD) pools the money of several investors into a diversified portfolio of stocks and shares which are held in the OEIC as shares. Because the number of shares are variable (unlike Closed Ended Investments of Investment Trusts where the number of shares available are fixed), an OEIC share is said to be an open ended fund as it expands by the issue of additional shares or contracts by the cancellation (redemption) of shares.

Another important distinction of OEIC’s compared to closed ended collective investment funds of Investment Trusts is that they are not allowed to borrow capital or financially gear to invest. Closed ended investment funds are allowed do this. 

Shares in an OEIC can be purchased as a single premium (lump sum) or on a regular premium basis.

The shares in an OEIC can be traded through the ACD or through an authorised financial adviser.

The price of an OEIC share is directly determined by the value of its underlying assets or Net Asset Value (i.e. the securities and cash held by the fund) divided by the number of shares in issue, i.e. the NAV per share.

 

What are the types of OEIC’s?

OEIC’s (open ended investment companies) and Unit Trusts are a form of medium to long term saving for the future. The Investment Management Association (IMA) classifies OEIC’s and Unit Trusts into over 30 different performance categories which are divided in five broad fund sectors which in total provide over 2,000 investment funds.

The Five broad fund sectors are:-

  • Funds principally targeting – Immediate Income
  • Funds principally targeting – Growing Income
  • Funds principally targeting – Capital Growth/Total Return
  • Funds principally targeting – Capital Protection
  • Funds principally targeting – Specialist Sectors

As expected each fund will have a level of risk or risk profile according to the objectives of the fund.  To ensure investors understand what the investment objective of the funds are likely to be within a given sector, a range of rules restrict the investment powers of authorised funds to spread its investments in asset classes in proportions appropriate to the fund sector it is in.  

 

Why should I invest in an OEIC?

The major reasons for recommending OEIC’s are that they offer a spread of investments managed by a professional manager.

Unlike Unit Trusts, OEIC’s are capable of being marketed internationally as they are the most widely recognised type of open ended collective investments in Europe.

Existing as stand alone funds, OEIC’s additionally allow its management groups to offer umbrella funds, which comprise a number of sub funds each with its own investment objectives.

This choice of funds provides the investor a level of risk/reward to mach their appropriate investment profile.

The treatment of income and gains from unit trusts will depend upon the tax position of the investor and whether the income received are dividends distributed from equity shares or interest distributed from fixed interest funds.

Dividends distributed from equity shares: are taxed in the same way as income and gains from other shares. This means non tax payers cannot reclaim the tax credit and higher rate tax payers have to pay an additional 22.5% in tax on the gross dividend.

Interest distribution from fixed interest funds: are paid net of 20% income tax. Non tax payers can reclaim the full tax deducted, and higher rate taxpayers have to pay an additional 20% income tax.

Capital gains tax payable: on disposal will be dependent upon the position of the taxpayer at date of disposal. All gains payable will attract indexation and taper relief and personal annual CGT allowances.   

However if the OEIC is held within an Individual Savings Account (ISA), all income and capital gains are tax free.

 

How do I invest in an OEIC?

The first and most important step after you have decided you may want to invest in an OEIC is to have a discussion with us to provide you with independent financial advice.

Once we have agreed what the most suitable type of OEIC is for your particular circumstances we make an application on your behalf to pay a single premium or regular contributions into a selected fund based on how much you can afford your personal tax situation and the amount of fund required at maturity, at the acceptable level of risk you are prepared to take to match your needs.

 

Want to know more?

Talk to one of our qualified financial advisers on 01553 777600 or e-mail us at enquiries@ringassociates.co.uk

Also you may want to read the articles and associated links from the Financial Services Authority by accessing the following website at http://www.moneymadeclear.fsa.gov.uk/products/investments/types_of_investments.html

And download the free booklet ‘Introducing Investment’ from the Investment Managers Association at http://www.investmentuk.org/FactSheets/II/introducinginvestment.pdf

and the fund sectors and categories from the Investment Managers Association at http://www.investmentuk.org/