Which is the best option: using an investment trust or an Oeic (open-ended investment company)? They seem almost the same – funds taking money from thousands of citizens paying charges to specialists who make investments on their behalf. According to the publication by the Association of Investment Companies, investment trusts are now holding about £141 billion, which is almost 2 times bigger than 10 years ago. However, Oeics are now holding £931 billion, which is a pretty impressive number.
So which to choose: a favour or an underdog?
What’s the difference?
Investment trusts are firms that are available on the stock market’s lists. When you invest there, you can manipulate shares by selling them, buying some more, or do anything else.
Your investment to an Oeic may be done through different platforms including Fidelity International, Interactive Investor, and Barclays Stockbrokers. However, the final result is that you buy Oeic’s units, not the shares of any company.
Often it will not be clear whether you are buying an Oeic or an investment trust on such a platform. However, only the latter are public companies and have plc after their name.
How much do they cost?
Traditionally, Oeics have been more expensive, but is this still the case? Exclusive analysis for Money, by the wealth manager Tilney Bestinvest, looked at 47 fund managers that run an investment trust and an Oeic in the same sector. These are known as mirror funds.
The research found that Oeics were in fact cheaper in 53% of cases.
For example, the popular Baillie Gifford Shin Nippon investment trust, which invests in smaller companies in Japan and is managed by Praveen Kumar, has an annual charge of 1.02%. The Baillie Gifford Japanese Smaller Companies fund, an Oeic run by the same manager, has an annual charge of 0.63%.
Jason Hollands, managing director at Tilney Bestinvest, which both sells and recommends investment trusts, said: “The historic cost advantage of investment trusts over open-ended funds simply no longer applies. In many cases, the former are now more expensive.”
He attributes the change to rules introduced in 2012 — under the Retail Distribution Review — that require Oeics to be more transparent about charges.
James Budden, a director at Baillie Gifford, said: “Investment trusts are plcs and, as such, carry extra costs such as director fees and corporate advisers like lawyers and accountants. We do most of our Oeic admin in-house.” He added, however, that in some cases running an investment trust can still be cheaper.
Other investment trusts that are more expensive than their Oeic counterparts include JP Morgan Global Emerging Markets Income, managed by Richard Titherington, which costs 1.24% a year. The same manager runs an Oeic called JP Morgan Emerging Markets Income, which charges 0.93%.
The Standard Life UK Smaller Companies investment trust, managed by Harry Nimmo, charges 1.14%. Nimmo also manages an Oeic called Standard Life UK Smaller Companies; it charges 0.99%.
Which is better?
The benefits of investment trusts were underlined by the recent freeze on withdrawals from Oeic property funds in the wake of the EU referendum. Companies such as M&G, Aviva and Standard Life banned investors from selling their holdings. The freeze will be reviewed on a regular basis.
Unlike with investment trusts, Oeic investors can get their money back only if the fund manager has enough cash to pay them. If the Oeic manager has invested in assets, such as commercial property, that can take time to sell, withdrawals may have to be blocked. This is to protect existing customers because otherwise assets may have to be sold when prices are down to pay the investors who want to get out. It is one of the reasons why property funds structured as Oeics keep up to 30% in cash. In extreme cases, this buffer can dry up.
The disadvantage of investment trusts is that they can be more complex. You have to take account of the share price as well as the net asset value (NAV), which indicates the value of the trust’s underlying holdings. If the assets are worth more than the share price would indicate, the trust is said to be trading at a discount to NAV. If the assets are worth less, it is trading at a premium.
In addition, while it may be easier to sell out of an investment trust, you may be doing so at the worst possible moment — when prices have fallen.
Also, investment trusts can borrow to invest, which Oeics cannot. This can boost profits but exacerbate losses.
Why is there so much more invested in Oeics?
Although advisers will highlight the benefits of investment trusts when asked, few include them in the lists of top funds that they publish online. Hargreaves Lansdown excludes trusts from its Wealth 150 list and Fidelity International from its Select list. Both say they are useful, however, and they would not discourage investment in them.
Hargreaves Lansdown said: “We rarely promote investment trusts due to potential liquidity and pricing issues. For example, the price paid could rise as a result of a Hargreaves Lansdown promotion or fall as a result of a sell note, to the detriment of the investor.”
Fidelity said: “We believe investment trusts are fantastic vehicles, but they can also be affected by a broader range of supply and demand issues. They can fluctuate between trading at a premium or discount to net asset value, making it more challenging to include these types of funds on a long-term list of fund picks.”
Ian Sayers, head of the Association of Investment Companies, said: “Charges have come down in the open-ended sector over the last few years, and many investment companies have been similarly reducing their fees — a win-win for investors. But . . . investment companies continue to have some extremely competitive charges as well as, in many cases, unrivalled track records of dividend increases.
“Since 2013, 37 investment companies have abolished their performance fees, particularly in the sectors focused on the public, and charges are something that investment companies’ boards have been keeping under close scrutiny.”