OEIC is a term you may see on the fact sheets of funds or collective investment vehicles.
But what does OEIC mean? And what are the characteristics of an OEIC?
What is the definition of an OEIC?
OEIC stands for Open Ended Investment Company.
OEICs are a popular type of collective investment scheme, and are commonly referred to as ‘funds’.
The name refers to the legal structure that the asset manager uses to create and manage the investments.
However, not all funds are OEICs. Other distinct legal forms include:
- Unit Trusts
- Investment Trusts
- Hedge Funds
What are the characteristics of an OEIC?
It’s worth pointing out that that Unit trusts and OEICs have more similarities than differences. For the majority of investors – the differences between them are barely noticeable.
I recommend that you pay more attention to other features of a fund:
- Does the fund have a passive investing approach or an active approach?
- Does the fund allow you to minimise investing costs?
- Does the fund allow you to diversify across many individual assets?
- Will adding this fund help you build a better investment portfolio?
The legal form of an OEIC
An OEIC, as the definition suggests, is a company. Therefore investors in an OEIC become shareholders in the company (Read more: what are shares).
Unit trusts, in contrast, take the legal form of a trust. Investors receive ‘units’ in the trust, rather than shares in a company.
The ‘open-ended’ part of the name refers to the manager’s ability to create and cancel shares.
This means that new investor cash enters the OEIC and is used by the asset manager to buy new assets.
Therefore if an investor wanted to invest £500m in a small OEIC, the manager would simply take the cash and buy £500m more assets in line with the investment strategy.
After the investment, the fund would have vastly more assets, but a proportionately higher number of shares. There would be little adverse pricing impact as the value of assets per share would remain the same.
The creation of new shares as new monies flow into the fund, and the cancellation of shares as monies are withdrawn from the fund, helps ensure that the price per share remains stable.
Investment trusts don’t have this benefit. They are formed with a fixed amount of capital on their creation.
Subsequent changes in supply and demand can lead the price of investment trust shares to trade at a premium or discount to the underlying value of the assets per share.
Why are OEICs popular?
OEICs are collective investment schemes. They allow many investors to pool small amounts of capital, and invest this pool of money across a vast array of individual assets.
OEICs are the most widely recognised type of collective investment in Europe. This makes them simpler products to promote and sell to international investors.
OEICs can be created with an ‘umbrella structure’, i.e. one company with multiple ‘classes of shares’ which allows for multiple funds within the same legal vehicle. Switches between funds become a simple matter of exchanging shares for little or no cost.