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You are here: Unit Trust & OEIC Guide

Unit Trust & OEIC Guide


Unit Trust or OEIC?

Unit Trusts and OEICs are both open ended collective investments and are subject to the same regulation. OEICs became available in May 1997 and were largely introduced as a more flexible and simplified alternative to the established industry of Unit Trusts.

An OEIC has an 'Umbrella' fund structure, allowing for many 'sub-funds' with different investment objectives. To the investor this means an easier way to move between different OEICs in the same management group, as there is less administration. OEICs can also offer different share classes for the same fund. This allows for private investors to invest in the same fund as large organisations.
Unit Trusts and OEICs have an initial charge that is detailed in management group literature or Key Features document. It can sometimes be as much as 6%. So for each £100 invested, around £94 is actually put into the fund. Equity funds tend to have the most expensive initial charge at 5%-6% and Index Trackers and Money Market funds the lowest at 0%-1%. Additionally, there is an annual management charge, which is typically 1-1.5%.

Some funds with low initial charges have a penalty exit fee for short term investors. This is to encourage people to keep their investment in the fund; the charges decrease the longer the time invested. Most funds have different charges for each share class. Institutional shares usually have much lower fees than retail shares due to the greatly increased initial investment into the fund.

Fees often reflect the costs associated with investing in a particular area, so Unit Trusts and OEICs that invest overseas tend to be more expensive than those investing in the UK. It can pay to shop around, as some management companies will be more cost efficient than others.
Unit Trusts also price differently to OEICs. Unit Trusts usually have a bid price (selling price) and an offer price (purchase price). OEICs have a single share price, the mid-market price.

The bid and offer price of a Unit Trust mirrors the value of its investments (known as the Net Asset Value). The difference between the bid and offer price is called the bid-offer spread and includes initial charges and dealing costs within its calculation. All OEIC shares are bought and sold at the single price and all charges, such as the initial charge, are shown separately, making it easier to understand exactly what costs are involved.

As OEICs have no bid-offer spread, sometimes when a large number of purchases or sales or a significant single deal occurs, the costs involved with altering the underlying assets of the fund (e.g stockbroker commission) may have a negative effect on the shares held by existing investors. To protect existing investors a 'dilution levy' (or charge) is paid by the purchaser/seller, which is paid directly into the fund. Since 1st August 2002, managers have also had the choice of applying a 'swinging single price' to their OEICs. The swinging system adjusts the price to include transaction costs, instead of a separate charge.
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