What are Open Ended Investment Company and Unit Trusts?

An Open Ended Investments Company (OEIC) and Unit Trusts are types of collective investment funds which are professionally managed.  The money invested in them is pooled together and is used to buy assets such as bonds, shares and property.  Akin to many similar investments the idea is for these assets to grow, be sold and reinvested for the benefit of all investors into the OEIC and Unit Trusts.

OEIC’s and Unit Trusts for the most part operate in a similar nature.  The main difference is in governance due to the variation of the legal entity.  In practical terms such a difference will not be noticeable to most investors.

OEIC’s and Unit Trusts are a useful vehicle for investors who wish to have a mixed portfolio of investments but they are either too inexperienced or simply do not have the time to allow them to make sensible choices into what investments to pursue.

Further and in addition, by using an OEIC or a Unit Trust the investor will be able to gain the benefit of having an experienced investor, known as a fund manager. The fund manager will make decisions into what to invest in at a reduced cost from compared to employing an independent fund manager.  Due to the collective nature of the OEIC’s and Unit Trusts, the fund manager will have access to a large pool of funds allowing them to invest in a diversified portfolio.  If the investor’s funds are relatively modest then such a portfolio is likely to be much more varied then they would be able to otherwise afford.

To invest into OEIC or Unit Trust the investor simply purchases shares (for an OEIC) or units (for a unit trust).  Most OEIC’s and Unit Trusts will have a minimum investment value, investors will be free to invest more than this value.  Once the investor has invested into the OEIC and Unit Trust then they will be able to monitor whether their capital has increased or decreased.  Any gains will be spread across all the investors based upon the % of shares and units that they own.  An investor is free to purchase more shares or units if they wish.

The investment has no maturity date and investors are free to remove some or all of their capital (by selling their shares or units) at any point.

How can an OEIC and Unit Trust be mis-sold?

OEIC’s and Unit Trusts carry two main risks to investors.

The first risk is that the value of the OEIC and Unit Trust can go down as well as up.  An OEIC and a Unit Trust rarely offer any guarantees concerning maintaining capital.  Therefore an investor needs to be made aware of this risk and must be comfortable with this risk prior to investing.

The second risk is that most OEIC and Unit Trusts will carry with them charges and costs which can deplete the value of the investment regardless of the overall performance of the underlying assets.

Examples of charges or costs that investors may encounter are as follows:-

  • Set up charges – Not all of the investor’s initial investment will be placed into the investment pool. Some monies will be used to cover the cost of setting up the investment.  Typical charges will be around 1% – 3%.  Whilst this is relatively modest it does mean that investors will need to experience some growth before they are at a “break even” point.
  • Difference between buying and selling – Similar to currency exchange rates many OEIC’s and Unit Trusts will quote a different figure for buying shares (or units) and selling them. As you would expect in the normal course of dealing the cost to the investor of buying the shares on a certain day would be more than the figure they would obtain for selling the shares on the same day.  It should be noted that not every OEIC and Unit Trust operates in this way.
  • Management costs – Whilst investing in an OEIC and Unit Trust should be cheaper than employing an individual fund manager to create and manage a bespoke portfolio they are not without their costs. Most OEIC’s and Unit Trusts will levy an annual charge which can be up to 2% of the value of the fund although there is a lot of difference in these.  In many OEIC and Unit Trust’s management fees will be combined with other expenses to give an Ongoing Charges Figure (OCF) or Total Expense Ratio (TER) to allow for comparisons to be made between different OEIC’s and Unit Trusts.
  • Dealing Charges – If the OEIC and/or Unit Trust has a high turnover of investments then dealing charges may add significant costs on top of the management fees. It can sometimes be difficult to predict dealing charges because they are dependent on whether or not market forces dictate the need to sell and reinvest.
  • Exit Charges – Some OEIC’s and Unit Trusts may levy charges for the sale of some or all of the relevant Shares or Units. Whether or not these charges apply will vary from fund to fund.

As can be anticipated the above charges and costs can significantly reduce the value of the investors funds.  The consequence being that even in a rising market there is no guarantee that the investor will receive growth.  It is important that all costs are discussed with the investor prior to an investment.

Whilst not necessarily a “risk” per se another important consideration is the fact that the investor has very little control concerning the underlying investments made by the OEIC and Unit Trust.  The investor simply has the choice of investing in the OEIC and/or Unit Trust and deciding when to remove their capital.  An OEIC and Unit Trust would therefore be unsuitable if an investor wanted to dictate individual investments.

What does this mean for me?

If you have been advised to invest in an OEIC or Unit Trust then it is important to consider whether or not you are satisfied with its performance.

If you are dissatisfied with its performance then you should consider how the same was sold to you.  Was the OEIC or Unit Trust suitable for your needs as an investor?  If you don’t believe that it was then you should speak to an adviser.

How can we help?

Here at Cooper Stern we are experts at advising individuals and businesses on potentially mis-sold complex financial products.

We offer a no-obligation initial review of a potential OEIC and/or Unit Trust claim, and advise on the strengths and weaknesses of making a claim. Following this, we work on a no-win no-fee basis meaning we will only take forward claims we believe have a strong chance of succeeding.

If you feel you have been mis-sold an OEIC and/or Unit Trust and want us to look into the matter for you please get in touch. You can fill in our simple online enquiry form and one of our expert advisors will call you back to discuss your mis-sold financial product in more detail. Alternatively, you can call us on 01204 328 287 and we will be more than happy to discuss your queries.

how can we help you?

Have any questions? Get in touch with the Cooper Stern team today by submitting an inquiry online.

There are no substantial up-front costs, and our clients like that. The claims we have settled so far have been on a full redress basis. The banks are misbehaving by making offers to businesses, partially repaying what they have paid, and saying they do not need legal advice and making very low offers. I would urge businesses who are affected to get in touch with us before it is too late.

Dan Fallows
Director, Cooper Stern