OEIC / investment trusts

bargainhunter888

Hi All, 
newbie Question:
OEIC - reading up, it suggests that the fund managers increase or decrease units depending on demand, does this mean that if they decide to issue more units, the value of your investment actually decreases and vice versa? is this similar to stocks where a company buys back / releases more shares int the market?
Investment trusts - so these are opposite to OEIC and are traded on the stock exchange and have the same dealing charges as an ETF?
why would someone invest in an IT rather than something like an ETF which sounds similar to me?
Thanks in advance

Linton

bargainhunter888 said:

Hi All, 
newbie Question:
OEIC - reading up, it suggests that the fund managers increase or decrease units depending on demand, does this mean that if they decide to issue more units, the value of your investment actually decreases and vice versa? is this similar to stocks where a company buys back / releases more shares int the market?
Investment trusts - so these are opposite to OEIC and are traded on the stock exchange and have the same dealing charges as an ETF?
why would someone invest in an IT rather than something like an ETF which sounds similar to me?
Thanks in advance

The OEIC fund manager only issues new units and buys the corresponding assets in response to new investment in the fund.  When a unit is sold back to the fund manager it is deleted and the underlying assets sold. (In effect, though of course buys and sells will be offset against each other). So the value of people's holdings is unaffected - they directly correspond to real assets. OEICs are never traded on the market, regulations require that their price matches the value of the underlying assets.

ETFs differ from ITs in that generally ETFs are index trackers whereas ITs are highly managed with specific objectives, or with a well defined "house style". So given you decide what you want before you buy it, there is very rarely any choice between the two. ETFs as trackers will be managed to follow their index whereas ITs are priced purely by market supply and demand so the price of a share may differ significantly from the value of the underlying assets.

Thrugelmir

Both OEIC's and ETF's will issue or cancel unit's/shares depending on customer trades.  The unit price will depend upon the total number of units in issue and the total fund valuation. The first being divided into the latter. Share buybacks and issuance is a totally different topic. 

Investment trusts have no requirement to purchase or sell underlying assets in response to purchase/sale of their shares. The share price is independent driven purely by supply/demand. 

bargainhunter888

Linton said:

bargainhunter888 said:

Hi All, 
newbie Question:
OEIC - reading up, it suggests that the fund managers increase or decrease units depending on demand, does this mean that if they decide to issue more units, the value of your investment actually decreases and vice versa? is this similar to stocks where a company buys back / releases more shares int the market?
Investment trusts - so these are opposite to OEIC and are traded on the stock exchange and have the same dealing charges as an ETF?
why would someone invest in an IT rather than something like an ETF which sounds similar to me?
Thanks in advance

The OEIC fund manager only issues new units and buys the corresponding assets in response to new investment in the fund.  When a unit is sold back to the fund manager it is deleted and the underlying assets sold. (In effect, though of course buys and sells will be offset against each other). So the value of people's holdings is unaffected - they directly correspond to real assets. OEICs are never traded on the market, regulations require that their price matches the value of the underlying assets.

ETFs differ from ITs in that generally ETFs are index trackers whereas ITs are highly managed with specific objectives, or with a well defined "house style". So given you decide what you want before you buy it, there is very rarely any choice between the two. ETFs as trackers will be managed to follow their index whereas ITs are priced purely by market supply and demand so the price of a share may differ significantly from the value of the underlying assets.

Thanks Linton - so IT are more similar to active funds, but traded on the market? if so why would someone choose an IT over an OEIC, given the there is a dealing charge to trade on the exchange.

Malthusian

There are charges to buy an OEIC as well - they may be expressed as different prices for buying and selling units (bid-offer spread) or a swinging price where the price is adjusted in response to inflows / outflows. One way or another moving money from your pocket into the accounts of companies so they can invest in their business has a cost. TANSTAAFL.

The main reasons for preferring an IT over an OEIC are:

• OEICs can close to withdrawals (like property funds at the moment, and in 2016 and 2008), whereas if you are absolutely desperate investment trusts can be sold at a massive discount to the NAV (whether you'd want to is questionable). There is a school of thought that illiquid assets should only be held via investment trusts to avoid the risk of the fund closing to withdrawals. Personally I would say that if there's a chance you'd be so desperate to sell commercial property or other illiquid assets that you'd swallow a 30-40% discount (of the kind seen in 2016), you shouldn't invest in those sectors at all.
  
• Investment trusts can borrow money, which increases the potential returns at the expense of higher risk (in the worst case a geared investment trust can go bust and lose all your money)
• You can sometimes buy investment trusts at discounts to the Net Asset Value (i.e. less than the sum of its parts); this can also work against you because the discount might have widened when you come to sell. Again it is higher risk for potentially higher reward.
  
• A historic perception that investment trusts are cheaper, especially for DIY investors, which has not been accurate since 2012. Prior to 2012 OEICs bundled platform costs and advice costs into the main management fee, at least for retail investors, which investment trusts didn't, which made investment trusts look cheaper. Now all those charges are generally separated out so ITs have lost this advantage.
  

bargainhunter888

Malthusian said:

There are charges to buy an OEIC as well - they may be expressed as different prices for buying and selling units (bid-offer spread) or a swinging price where the price is adjusted in response to inflows / outflows. One way or another moving money from your pocket into the accounts of companies so they can invest in their business has a cost. TANSTAAFL.

The main reasons for preferring an IT over an OEIC are:

• OEICs can close to withdrawals (like property funds at the moment, and in 2016 and 2008), whereas if you are absolutely desperate investment trusts can be sold at a massive discount to the NAV (whether you'd want to is questionable). There is a school of thought that illiquid assets should only be held via investment trusts to avoid the risk of the fund closing to withdrawals. Personally I would say that if there's a chance you'd be so desperate to sell commercial property or other illiquid assets that you'd swallow a 30-40% discount (of the kind seen in 2016), you shouldn't invest in those sectors at all.
  
• Investment trusts can borrow money, which increases the potential returns at the expense of higher risk (in the worst case a geared investment trust can go bust and lose all your money)
• You can sometimes buy investment trusts at discounts to the Net Asset Value (i.e. less than the sum of its parts); this can also work against you because the discount might have widened when you come to sell. Again it is higher risk for potentially higher reward.
  
• A historic perception that investment trusts are cheaper, especially for DIY investors, which has not been accurate since 2012. Prior to 2012 OEICs bundled platform costs and advice costs into the main management fee, at least for retail investors, which investment trusts didn't, which made investment trusts look cheaper. Now all those charges are generally separated out so ITs have lost this advantage.
  

so unlike an ETF, there maybe a scenario in the future you cannot offload the units in an OEIC - i suppose that those are more likely as you mentioned property - as opposite to index trackers
if an IT goes bust is your investment still protected by FSCS like an OEIC?

Thrugelmir

With ETF's you may well find the spread widens considerably if there's difficulty in trading the underlying securities. 
OEIC's have a window in which to offload the underlying securities, i.e. not instanteous. 
How do envisage an investment trust going bust? 

bargainhunter888

No idea, suggested by Malthusian in response to my post 
"Investment trusts can borrow money, which increases the potential returns at the expense of higher risk (in the worst case a geared investment trust can go bust and lose all your money)"
i'm just asking the questions

NedS

Malthusian said:

The main reasons for preferring an IT over an OEIC are:

• OEICs can close to withdrawals (like property funds at the moment, and in 2016 and 2008), whereas if you are absolutely desperate investment trusts can be sold at a massive discount to the NAV (whether you'd want to is questionable). There is a school of thought that illiquid assets should only be held via investment trusts to avoid the risk of the fund closing to withdrawals. Personally I would say that if there's a chance you'd be so desperate to sell commercial property or other illiquid assets that you'd swallow a 30-40% discount (of the kind seen in 2016), you shouldn't invest in those sectors at all.
  
• Investment trusts can borrow money, which increases the potential returns at the expense of higher risk (in the worst case a geared investment trust can go bust and lose all your money)
• You can sometimes buy investment trusts at discounts to the Net Asset Value (i.e. less than the sum of its parts); this can also work against you because the discount might have widened when you come to sell. Again it is higher risk for potentially higher reward.
  
• A historic perception that investment trusts are cheaper, especially for DIY investors, which has not been accurate since 2012. Prior to 2012 OEICs bundled platform costs and advice costs into the main management fee, at least for retail investors, which investment trusts didn't, which made investment trusts look cheaper. Now all those charges are generally separated out so ITs have lost this advantage.
  

Another factor which is very relevant at the moment, is that an IT has the ability to retain some income to smooth future dividend payments, so whereas income from your OEIC equity income fund may have just plummeted as a result of the underlying assets cancelling their dividends, your well managed dividend income IT who has been putting a little aside for just such an eventuality is able to sustain, or even increase it's dividend payouts meaning you will not be forced to sell assets at a market low to be able to afford to eat and pay the bills next month.

Linton

bargainhunter888 said:

if an IT goes bust is your investment still protected by FSCS like an OEIC?

When you invest in an IT you simply hold shares in a company which just happens to invest in other companies.  That company like any other could go bust, in which case you will probably lose everything.  There is no ringfencing and FSCS does not cover losses arising from poor or unlucky investing.

Equally your investment in an OEIC wont be covered if poor but legitimate investing happens to lose all your money.  However your investment is ringfenced from the fund management company's money and so wont be lost if the fund management company goes bust. it is also covered by FSCS against the possibility of illigitimate activity such as fraud.

Albermarle

You see people 'complaining' on the forum that when you buy/sell and OEIC , you do not know in advance what the price is .
This is determined at a valuation point sometime usually in the next 12 to 36 hours.
If you buy an IT , you know the price , although you have to pay a dealing charge and 0.5% stamp duty.
Also worth mentioning is that some investment platforms have much reduced pricing for holding IT's as opposed to OEICS.