An Open-Ended Investment Company, usually referred to as an OEIC, is a collective investment scheme which pools money from several individual investors into one single fund. The fund is then managed by a professional asset manager.
What is an OEIC?
OEICs are also referred to as open-ended funds and can invest capital in many different asset classes including equities (shares); fixed income (bonds); property; and other investments.
Being an open-ended fund means there is no limit to the number of shares that can be issued. As more individuals invest in the fund, more shares are then created.
As you would expect, there are many different types of OEICs each with its own investment objectives. For example, some funds offer the potential for capital growth, where profits are re-invested back into the OEIC (accumulation shares).
Other funds seek to deliver an income return to investors in the form of dividends or interest that are paid out on a regular basis (income shares).
What are the advantages of investing in an OEIC?
Like any investment product, there is always a risk of a capital loss depending on the performance of the assets held by the underlying fund. But there are also many benefits of investing in an OEIC.
- Choice over assets classes, sectors and geographical territories: OEIC funds invest in shares, fixed income or property; or specialised industrial sectors like technology or consumer goods; or in different countries and regions around the world.
- Spread of investment risk: Investors capital is pooled and allocated across a range of different companies and financial instruments. Therefore, investors avoid exposure to single company failure.
- Tax advantages: OEICs are eligible for Individual Savings Accounts (ISAs) and up to £20,000 (for tax year 2020/21) can be sheltered from any tax liabilities payable on disposal of the investment.
- Investor protection: Title to the underlying shares and investments are held by the fund which is overseen by a trustee or depositary. Should the fund management company fail or get into financial difficulty, the assets are held separately for safekeeping on investors behalf.
- Eligible for the Financial Services Compensation Scheme (FSCS): Where authorised OEICs are regulated by the Financial Conduct Authority, investors will be covered under the FSCS should the fund manager fail (but not if the investment itself under performs).
Tax implications of investing in an OEIC
There are some tax considerations to keep in mind when investing in an OEIC fund:
- The OEIC is tax transparent which means that no capital gains tax (CGT) is incurred on investment gains made by the fund
- Retail investors may be liable to CGT on gains made above £12,300 (the tax-free allowance for 2020/21) when selling all or part of their investment in the fund
- Dividend income received in excess of £2,000 (the tax-free dividend allowance) is liable to income tax
- For basic rate tax payers, interest income received below £1,000 is free of tax. For 40% higher-rate tax payers, the tax-free amount is £500. 45% tax payers do not receive this allowance.
- Paras 2,3 & 4 do not apply for those who have invested through an ISA.
What are the costs of investing in an OEIC?
Investing in an OEIC is not like buying and selling shares in a listed company on a recognised stock exchange, where investors expect to pay the bid-offer spread. With an OEIC there are costs charged to individual investors plus additional costs incurred directly by the fund.
Fund costs:
Because the pooled investments are held through a fund, in effect a corporate structure, there are additional costs associated with running this structure which must be covered. These costs are paid by the fund from profits earned by the fund and will impact overall investor return.
1. Bid-offer spread: The margin paid by the fund on buying and selling shares through a broker
2. Annual management fee: This is the charge levied by the asset manager on the fund. This fee can be up to 1.5% of the value of the assets held for more actively managed funds
3. Professional fees: Accountants, auditors, lawyers, trustees, custodians all need to be paid for services provided to the fund.
Investor costs:
In addition to the costs incurred by the fund, investors can also expect to be charged as follows:
1. Initial cost: This is the fee charged when buying new shares in the fund at the outset. Expect to pay up to 2%
2. Redemption fee: This is the cost levied when selling shares in the fund. Not all funds charge this exit fee.
Where to buy an OEIC
Unlike shares in a listed company, OEICs cannot be purchased on the stock exchange. However, investors can purchase OEICs directly from the fund management company or an agent of the fund provider. For example, M&G Investments and Aviva Investors offer a range of OEICs to choose from.
In addition to direct purchase, investors can also use online fund platforms which provide access to a wide selection of diverse OEIC investment products offered by several different asset managers. For example, Morningstar, an independent financial research company, has a comprehensive list of OEIC fund mangers available through its online platform.
For retail investors who are unsure as to which investment product to choose, they should consider taking independent financial advice. To learn more about choosing a financial adviser, please follow the link.
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