Open Ended Investment Companies (OEICs)

Overview

An Open-Ended Investment Company (OEIC) is the UK’s modern and more flexible fund structure, which succeeds the older unit trust, with “open-ended” meaning the fund itself grows or shrinks as investors buy in or take their money out. 

This works by creating new units when investor money comes in, and they are cancelled when money leaves, with everyone dealing at a single price based on the fund’s Net Asset Value (NAV), which is calculated once a day. 

How they're structured

An OEIC is run by a corporate director who is responsible for managing the fund in line with the prior stated investment objective. 

Most OEICs are set up as umbrella companies, which means they house multiple separate sub funds which different investment strategies under a single overarching legal structure. This is more efficient for the fund provider to administer. 

Examples

Typically, UK fund groups run extensive OEIC ranges spanning different regions, asset classes and risk levels such as Fidelity, Vanguard, and HSBC Global Strategy. 

Regulation

OEICs are authorised by the Financial Conduct Authority (FCA) and are usually classified as either UCITS (which is when funds meet a common EU/UK retail fund standard allowing wide distribution) or Non-UCITS Retail Schemes (NURS) which have somewhat more flexibility in terms of what they invest in.

OEICs vs Investment Trusts

The simplest way to understand an OEIC is by comparing it to an investment trust. An OEIC is open-ended, meaning its size flexes with investor demand and is priced at its NAV as discussed before. 

However, an investment trust is close-ended, with a fixed number of shares trading on the stock exchange at whatever price has been decided by supply and demand either above or below the underlying NAV. 

Advantages and disadvantages

The advantages of OEICs are that they offer straightforward diversification and are generally easy to buy and sell. The disadvantages include that when money floods in or out of the fund, the manager can be forced to buy or sell underlying holdings at less than desired prices just to meet investors' demand. Also, some OEICs apply a dilution levy to protect existing investors moving in and out.