Money: A new investment is born

The unit trust business is set for a shake-up, says Ken Welsby

The price war in the unit trust and Pep business is expected to take a new turn in the coming months with the arrival of a new type of managed fund known as the Oeic. An Oeic (pronounced "oik") is an open- ended investment company, a structure which is well established in continental Europe, but new to most UK investors. Like its cousins the unit trust and the investment trust, an Oeic can be held tax-free in a personal equity plan.

Government regulations to allow Oeics came into force earlier this month, but it could be a month or more before the first funds are launched. So what's in a name? In the case of the Oeic, it tells you quite a lot about the product. First, the fund is open-ended, which means that - like a unit trust - it can take in as much money as investors are prepared to subscribe. This contrasts with closed-end funds, such as investment trusts, where subscriptions are limited to the amount of share capital.

An Oeic is an investment company, so it is controlled by a director or directors rather than trustees, and it can - but usually won't - be quoted on the stock market. Your investment in an Oeic therefore consists of shares, rather than units. The next new feature is that an Oeic will be an umbrella fund, with several sub funds, each with its own distinctive flavour.

This could mean, for example, that someone investing pounds 100 a month could put pounds 50 in a conventional UK growth and income fund, pounds 25 in emerging markets and pounds 25 in corporate bonds. Then, at year end, you could switch all or part of your holdings into whichever fund held out the best growth prospects for the future. The charge for switching would probably be either nominal or entirely free, since it would enable the fund manager to keep your business rather than losing it to a competitor.

This contrasts with the way that unit trusts operate, where you have to sell and re-invest, incurring charges on both sides of the transaction. Much of the spadework for the introduction of Oeics has been the work of Autif, the Association of Unit Trusts and Investment Funds and a key role in the project was played by its director of legal and fiscal affairs, Sheila Nicoll. "The umbrella structure is one of the most important features of the Oeic since it enables an investment vehicle to be tailored to meet the investor's specific objectives," she says.

This emphasis of flexibility is reflected in another big difference between unit trusts and Oeics: the new funds will be able to have different classes of share, each with its own specific conditions and charging structure. The different share classes can even be denominated in different currencies. To UK investors accustomed to straightforward investment in equities or unit trusts, the concept of share classes might seem an unnecessary complication - but as Sheila Nicoll explains, it's all part of the Oeic's wide appeal.

"The fund must issue public shares, available to everyone who completes the paperwork and pays the subscription," she says. "Beyond that, it's up to the fund manager to create the share classes for specific needs. For example, there could be a specific class of share for sale to Pep investors, or to institutions dealing in millions, or maybe one sold only through IFAs which paid commission.

"All these are possible, and no doubt there will be many more; it will be a matter of what's appropriate for each segment of the market."

Which brings us to perhaps the most obvious difference between unit trusts and Oeics - the price at which they are bought and sold. Look at the prices of most unit trusts, and there is a spread between the sell and buy prices - often known as bid and offer prices - at which the fund sells units to new investors and buys them back from those withdrawing their cash.

In other words, when you buy or sell units you are paying more or getting less than the net asset value (NAV) - the value of the assets held in the fund divided by the number of units issued. In contrast, Oeics will be both sold and bought at the net asset value. The commission and charges will be shown separately - according to a published price list. This transparency of pricing - in which customers can see immediately how much is being invested and how much they are paying for service - is one of the key principles of the Oeic.

Ms Nicoll says simply that investors often do not understand the dual pricing of unit trusts, and the move to single pricing and transparency will simply bring Britain in line with the rest of the world, particularly the rest of Europe. And therein lies one of the reasons why Oeics are being introduced. Not simply to give savers more choice, but to give the fund management industry in the UK a product which they can sell easily in other European markets.

The first moves towards cross-border selling of investment products were taken in the 1980s when the European directive on collective investments - known as the UCITS directive - introduced the concept of a "passport" for managed funds. The idea is that once a fund has been approved in one EU member state it can be sold in the rest of the Union without requiring approval from other national governments.

But because unit trusts are not familiar to continental investors, there has until now been little scope for UK products to be exported to the rest of Europe. The expertise of fund management has remained in London and Edinburgh, but what has been exported is the administrative work, which accounts for 60 per cent of management costs and a similar share of the employment. Most of this has gone to Dublin and Luxembourg, where the legal frameworks for open-ended funds are well established.

Over the past five years the assets of UK fund managers in Luxembourg and Dublin have climbed from $3.3bn to almost $20bn, and since the late 1980s funds under management in these centres have increased fourfold, while those in London have only doubled. But the arrival of the Oeic does not just open mainland Europe to UK products, it also opens our doors to others - not just funds from continental Europe, but also some of the large US asset managers who may now prefer to operate from London rather than Dublin.

The i's are still being dotted and the t's being crossed, so don't expect to see any of these new funds being launched next week. But over the next two years industry analysts expect that as many as 300 existing unit trusts will probably convert into Oeics - taking advantage of a concession in the Finance Bill which exempts such conversions from tax and stamp duty until 1999. The first conversions will probably be trusts whose management has changed hands. But don't worry if it happens to your unit - the underlying assets will not be affected.