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Reading 2021-11-01

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Notes from reading

OEIC: Open-Ended Investment Companies are collective investment vehicles established as companies that have evolved as an alternative to Unit Trusts in the UK. These funds offer investors a professionally managed portfolio of pooled funds that can invest in a range of underlying securities according to a predetermined investment strategy. OEICs have some similarities to both Unit Trusts and Exchange Traded Funds (ETFs) and all three options should be considered by those investors looking to outsource the day-to-day management of their investment capital.

OEICs are close relations to European SICAVs or US Mutual Funds in that they are designed to allow investors to access a diversified and managed portfolio in a relatively cost-effective and tax-efficient manner.

OEICs are listed on the London Stock Exchange (LSE) and the price of the shares are based largely on the value of the underlying assets – be these stocks and / or other securities – of the fund.

OEICs are described as “open-ended” because they can create new shares to meet investor demand and will cancel shares of investors who exit the fund.

The key differences between ETFs, and OEICs and unit trusts

Transactions

  • Because you buy and sell an ETF on a stock exchange, you know roughly what price you’ll pay when you buy it
  • OEICs and unit trusts are a bit more unpredictable, as they’re subject to forward pricing. This means when you place, say, a buy order, it’s processed at the next valuation point– when the fund manager works out the price of the shares or units. Depending on market fluctuations, you could end up paying more or less than the last price available when you placed the order. It’s similar when you sell.

Costs

  • ETFs generally have lower annual costs vs OEICs and unit trust

Valuation

  • The pricing of OEICs or unit trusts is easier to understand. Due to their open-ended structure, the price rises and falls in line with the value of the underlying investments.
  • An ETF is subject to market forces as you buy and sell it on a stock market, so it can trade at a premium (above) or at a discount (below) to the value of its underlying investments.

Risk

  • Beside of typical market risk as in OEICs and unit trusts, there’s increased risk when you invest in a synthetic ETF. If the investment bank selling the derivative, which exposes the ETF to the underlying investment, fails to meet its obligations, you could lose money. This is known as counterparty risk.