Unit Trusts & OEICs (Collectives & Splits)

A collective fund is one into which monies from many investors are pooled, and may be invested in a number of different sectors – shares, corporate bonds, property, etc. – according to the financial objective of the fund, and preferences in terms of style, risk level, etc..

It is not unusual, for example, for a collective fund to hold investments confined to a particular geographical region, such as Europe or the Far East, and/or to confine its activity to a specific market sector, or sectors, such as property or technology.

Pooling money together with many other investors allows an investor to become involved in areas that would otherwise be uneconomical, or present too high a level of risk. Unit trusts and OEICs ("Open Ended Investment Companies") are both open-ended collective funds, which means that the value of the fund can fluctuate according to supply and demand.

Unit Trusts & OEICs

Investment in a unit trust involves buying a proportion of the total fund – known as a "unit" – while an OEIC involves buying an actual share in the investment company. In either case, the total fund is invested, by a fund manager, in such a way as to achieve the best results for unit holders, or shareholders, according to the investment objective; the investment objective may be, for example, capital growth, regular income or a combination of the two.

A unit trust can hold any number of investments, to any value, but are typically limited to between 50 and 100, with a total fund value of between £5 million and £1 billion. Even in the case of a relatively small fund, the nature of collective investment means that charges for administration are inconsequential, and the fund can be spread across a wide range of investments; management charges, annually, are typically in the region of 1% or 2%.

The value of a unit at any time depends, obviously, upon the value of underlying investments, but also on the number of units issued at that time. Unit trusts have two prices, a buying, or "offer", price and a selling, or "bid" price. The difference between the two prices is known as the "bid/offer spread", and is typically in the region of 5%. The significance of the bid/offer spread, for investors, is that the price of a unit may rise by that amount before the original investment can be recouped.

An OEIC, on the other hand has a single buying and selling price, with a charge taken, initially, based on the amount invested, plus an annual management charge. Investors buy or sell shares in the investment company – which is legally constituted as a limited company – from an OEIC Manager, and the value of shares fluctuates with the value of underlying assets.

Some investors consider the pricing of OEICs to be fairer and more transparent than that of unit trusts – charges are explicit, itemised, and apply to those creating expense for the fund – and there are some other benefits in terms of flexibility and currency structure.

Split Capital Investment Funds

A split capital investment fund, or "split", is an investment, or rather a collection of investments, in a number of quoted companies. In other words, money invested into the fund is used to buy stocks and shares in companies – creating a portfolio of underlying assets – and the shares are traded on the Stock Exchange.

Various types of investment, including unit trusts and OEICs can be based on splits, and splits companies have been in existence for more than a century. Splits typically have a lifetime of between 5 and 10 years, but their great advantage is that the type of investments can be tailored to suit the requirements of individual investors.

If an investor prefers safe, but limited, capital growth, for example, he, or she, can choose a zero dividend preference shares option; this guarantees a fixed capital amount when, but not before, the fund is liquidated. If, on the other hand, regular income is the preferred option, an income shares option can often provide a better rate of interest than that from a bank, or building society, plus limited growth of the original capital, in the best cases.

Variations include annuity income shares, which provide regular income but consume original capital, and income and residual capital options, which attempt to balance a reasonable income with a proportion of the remaining fund on liquidation.

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