The Open Ended Investment Company (OEIC) is a special type of investment fund domiciled in the United Kingdom and structured to invest in securities. Shares in an OEIC are bought and sold at the London Stock Exchange (LSE), making them easy to find for the UK investor.
Any UK investor that has reached the age of majority may invest in an OEIC. They can due so through their regular broker or trading platform as long as that platform allow you to trade LSE stocks.
Important: United States residents are not permitted to hold OEIC shares. If you become a United States resident and already own OEIC shares, you must sell them or transfer them to an eligible person who is a UK resident.
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Open-ended
An OEIC is open-ended, which means that the fund can create new shares to meet investor demand. Since there is no limit on number of shares, the market price on shares is largely based on the value of the assets in the fund.
Pricing
OEICs are priced once a day, based on the net asset value of their underlying portfolio assets.
Strategy
An OEIC is permitted to mix different types of investment strategies and also continuously adjust both fund size and investment criteria. You can therefore find OEIC:s that are a blend of income investments, growth investments, small cap investments, large cap investments, and so on.
Are OEICs tax-advantaged?
No, OEICs are not tax-advantaged.
- Interest is taxable
- Dividends are taxable
- Selling shares with a profit incurs a capital gains tax
Important: Inform yourself about dividend and capital gains tax allowances before investing.
The ”loophole”
UK shareholders can hold OEICs tax-free in their Individual Savings Account (ISA) or other U.K. pension plan.
Ongoing charge figure
Most OEICs carry sales charges and annual management fees, known as the ongoing charges figure. For the investor, it is important to seek information about this in advance and decide if the cost is really worth it. Some OEICs cost a lot, and that is money that could have been invested instead. Each £1 you pay in sales charges and annual management fees is a £1 that could have been invested for profit instead, and that can make a significant difference for your portfolio over time due to the principle of compound interest.
If you want to keep the costs down, look for funds that are not actively managed, such as index funds.
Important:
- Data from 2019 show that OIEC investors typically pay around 2% in initial charge when buying new shares.
- Most OIECs will charge you an annual management charge (AMC) around 1%-1.5% of the value of your shares.
- Most OIECs will quote a total expense ratio (TER) or an ongoing charges figure (OCF). Neither TER nor OCF includes dealer charges. If the fund has a high turnover rate, dealer charges can dramatically increase the true annual costs.
- Some OIECs will require you to pay an exit charge each time you sell shares. The exit charge is based on a percentage of the total value of the sale.
Time frame
OEICs are typically used for medium-term to long-term investments. Although the shares are exchange-traded and usually easy to sell, many investors hold on to their OEIC shares for five to ten years, or even longer.
Is OEIC the same as an open-ended U.S mutual fund?
No. While there are strong similarities between them, an OEIC is governed by United Kingdom law for OEIC:s while a U.S. mutual fund is governed by United States law for mutual funds.
Is OEIC the same as a United Kingdom unit trust (UT)?
No. OEICs and UTs are similar, but not identical.
One of the main differences concern the pricing. A unit trust has two prices: bid price and offer price. The offer price is the price for purchasing a unit of the fund, while the bid price is the price per unit sold back to the fund. An OEIC has only one price per day, and it is based on the net asset value of the fund´s underlying assets.
OEICs tend to have a less complex structure than UTs and therefore also lower costs for the investor.
In the United Kingdom, OEICs and United Kingdom unit trusts are among the two most common types of investment funds. In recent years, many investment companies have converted their old unit trusts into OEICs.