What is an Open Ended Investment Company - OEIC
An open-ended investment company (OEIC) is a type of company or fund in the United Kingdom that is structured to invest in other companies with the ability to adjust constantly its investment criteria and fund size. The company's shares are listed on the London Stock Exchange, and the price of the shares are based largely on the underlying assets of the fund. These funds can mix different types of investment strategies such as income and growth, and small cap and large cap.
BREAKING DOWN Open Ended Investment Company - OEIC
An open-ended investment company is used in the United Kingdom for investing in the stock market. Investors’ money is pooled and spread across a wide range of investments, such as equities or fixed-interest securities. This diversification helps reduce risk of losing an investor’s principal. OEIC funds offer the potential for growth or income as medium to long-term investments for five to 10 years or longer.
Due to changes in U.S. legislation, U.S. residents may not hold shares in OEICs. U.S. shareholders must have the OEIC sell their shares or transfer their investments to U.K. residents.
Features of an Open-Ended Investment Company
U.K. investors 18 years or older may invest in a wide range of funds managed by industry experts. Various levels of risk are available for capital growth, income or a combination of both. Shareholders may invest for themselves or for their children. When children turn 18 years old, they hold the investment in their own right.
OEICs are useful for investors who do not have the time, interest or expertise for actively managing their investments. Investors may provide a single payment or monthly payments with minimum amounts depending on the fund, and access to funds online or over the phone is generally easy. Shareholders may pay a fee when moving between funds. However, shareholders may invest tax-free through a stocks and shares Individual Savings Account (ISA).
However, investment values and resulting income are not guaranteed and may increase or decrease, depending on investment performance and currency exchange rates for funds investing overseas. Therefore, a shareholder may not get back the original amount invested.
Charges for Open-Ended Investment Company Shares
Investors pay an initial charge of around 2% when buying new shares, as of 2016, which lowers the amount of money going into the fund. An annual management charge (AMC) may be 1.5% or more of the value of an investor’s shares and covers the fund managers’ services. Funds that are not actively managed, such as index trackers, have much lower fees.
The total expense ratio (TER) or ongoing charges figure (OCF) is quoted by most funds. Each charge includes the AMC and other expenses used for comparing different products. The TER and OCF do not include dealer charges that can add significantly to annual costs if the fund has a high turnover rate.
The exit charge for selling shares is a percentage of the total value of the sale. Many OEICs do not charge exit fees.
Difference Between Open-Ended Investment Companies and Unit Trusts
In the United Kingdom, unit trusts (UT) and OEICs are the two most used types of investment funds. Unit trusts consist of a manager who buys stocks and bonds for holders of a fund, in an open-ended format. Each unit is priced based on the net asset value of the underlying assets of the fund, and the price is only given once each day. OEICs, on the other hand, create and cancel shares instead of units as investors enter and exit the fund, much like a public company.
The two also differ in the way that they are priced. Unit trusts will have two prices, the bid price (price per unit received for each unit sold back to the fund) and the offer price (the price to purchase each unit of the fund). OEICs publish only one price per day.