Unit Trusts and other open-ended investment companies have been at the forefront of professional advisers’ and investors’ minds for several decades
Indeed, as a much younger stockbroker, I was responsible for setting up the Unit Trust Advisory Service for Hoare Govett, though both that body and its distinguished City name have long since disappeared.
Investment trusts suffered a setback 15 or so years ago when some managers got caught up in the split-cap scandal, which led to mis-selling allegations and heavy fines levied by the regulator. Then came a period of time when advisers were reluctant to recommend investment trusts because of this and worries about liquidity.
Investment Trusts, of course, are close-ended investments and this gives them several advantages over unit trusts and Oeics. For a start, this structure means they generally have a fixed amount of assets and they do not automatically increase or decrease in size if money enters or leaves the funds. This means the fund managers can take a long-term view of the market.
Unit Trusts and Oeics, on the other hand, expand or contract depending on supply and demand. In their case, fund managers have to manage fluctuations in the size of the fund as clients either invest or withdraw money, and so in tough or difficult markets the managers can be forced to sell assets to meet redemptions. However, the flexibility that unit trusts and Oeics offer when it comes to investing as little as £25 regularly or a £500 lump sum means relatively painless access to stock market investment.
Investment trusts are also traded on a recognised stock exchange and therefore are regulated by company law and listing rules. This gives investors the flexibility to buy and sell their shares at a quoted price.
That price is affected by market sentiment as well as performance of the underlying assets of the fund, giving the investor a transparent choice over whether to buy or sell, whereas unit trust funds and Oeics depend on the value of the underlying assets at the time the investor may wish to withdraw cash. On the other hand, being open-ended means that investors can freely buy or sell shares in the fund by buying or selling ‘units’, avoiding the lack of liquidity that affects many investment trusts.
Unlike both unit and investment trusts, the appeal of the Oeic is that it has no spread between bid and offer as all shares are bought and sold at the same price, so there is no need to work out the spread.
There is a view that as shareholders, rather than unit holders, investors in investment trusts have much more influence on governance and management – voting on key issues and attending annual general meetings – than investors in Oeics.