Wise to be wary of an oik

"OIKS", PAUL repeated, "what should I do, vote in favour or against?"

He was talking about the 86-page proposal which an investment company had sent him about what appeared to be a new type of investment called open-ended investment companies (Oeics). It says that converting existing unit trusts into Oeics will make investments that much easier to understand. I reminded Paul that none of us should expect a company promoting an idea not to put a positive spin on it.

The long and the short of Oeics is that investors are generally not better off by the conversion proposals, but the companies promoting them are hardly likely to accede to such a notion. The good news I added was that nor were investors materially worse off.

"OK", said Paul, "why are they wanting to convert some of their unit trusts into Oeics?" There are three primary reasons. The first is that European investors do not understand what is very much an Anglo Saxon structure to investment companies. It is easier therefore to accede to the European structure than retain two different systems if unit trust managers want to expand into Europe. Clearly an economy of scale should also result in a reduction in management charges, but this is theory - inevitably companies will ensure that there is the capacity to increase those fees.

Secondly some companies have not been slow to see the opportunity to do some investment fund spring cleaning, such that a number of unit trust funds will be merged or converted (as it is officially known) into other funds. "Hang on." said Paul. "Does this mean my new holding could have different investment goals than the unit trust it once was?" "Certainly," I replied, "but if you are not happy with the fund your money will be converted into, you can always choose one that is more acceptable to you." "How nice," he replied unconvincingly.

The third reason is flexibility. Oeics can be priced to suit the type of investor the investment institution happens to be dealing with. The jargon is differential pricing, but to the likes of you and I it merely means that companies can price the shares (they will no longer be referred to as unit trusts) differently, and obviously at a lower price to the institutions than to private investors.

"Well so far so good", said Paul, "but I don't see how this really benefits me and you haven't mentioned single pricing, which the proposal documents says is the principle benefit for me." Perhaps that's because single pricing and the benefit it brings are in my opinion more reminiscent of the emperor's clothes. This is because most investors, quite naturally, do not understand the complex issues surrounding charges, but those companies involved in moving to Oeics are hoping that if you tell people often enough that this is the primary benefit, they might believe it.

The best way to get your thoughts around the issue of costs is to look at the information supplied in the key features document which spells everything out in pounds and pence so to speak. It seems to have escaped most industry commentators' attention that even though the current pricing structure has been with us for more than 30 years consumers find it still a bit of a struggle.

This begs the question why on earth they should take to the new structure any easier than the old one. Clearly it remains to be seen. "Ah ha, I've got you there," said Paul. "The new structure means you buy at one price and sell at one price, so that it is simpler than all that bid/offer spread stuff." If only it were true, I smiled. Under the new system you have to remember to add the initial charge to that single price because of the costs of dealing in the shares, stamp duty and of course commissions. I grant you that this initial charge is no longer called a bid/offer spread, but it has a similar purpose.