Personal finance: At last: a breed of oik that knows how to behave

IS THE financial industry inventing investments for lager louts? So it would seem, judging by the bizarre-sounding "oik", a new product that seems likely to soon become the commonest type of investment available on the market.

In fact, despite the unfortunate name, Open-Ended Investment Companies, or OEICs, are perfectly respectable products. Their expected growth in the coming 12 months is largely connected to the fact that fund managers are busy converting their unit trusts into OEICs as quickly as they can.

OEICs are a cross between unit and investment trusts with some unique features. Their main characteristic is the way in which they are priced. With an OEIC there is one price for both buyers and sellers. This is the mid-market price of the underlying shares. Unit and investment trusts have two prices - the offer (the price at which an investor buys) and bid (the price at which an investor sells).

With unit trusts the spread between the two prices is typically 5 to 6 per cent. This is known as the "initial charge", which is paid to cover the fund manager's expenses such as commission, advertising, administration and dealing costs.

The price spread with investment trusts is smaller. This is because this form of collective investment is a limited company whose shares are quoted on the London Stock Exchange. Its "business" is managing a portfolio of shares.

Although with OEICs there is a single price for buyers and sellers, this does not mean the initial charge has been scrapped: it is simply shown separately at the time the investment is made. The industry sees this charging transparency as the main advantage of OEICs - but, in an age of consumerism, this is hardly earth-shattering.

The other often cited advantage for the investor is that OEICs are flexible: they can adopt an "umbrella" structure. A single OEIC may have several "sub-funds", each with different investment objectives, such as growth or income, with different elements of risk.Identical sub-funds could also have different buying and selling charges. This structure gives OEICs the flexibility to keep up with changing consumer demands. Furthermore, the grouping of the funds in this way gives OEICs the opportunity to improve upon the cost efficiencies of unit trusts. Tthis should benefit investors. It should give investors the opportunity to switch economically between different sub-classes.

There is one aspect of OEICs which is not theoretically good news. The assets of each sub-fund are treated as separate. However, as far as shareholders are concerned, the sub-funds are not "ring fenced". Consequently, in the - unlikely - event of assets in one being insufficient to satisfy its liabilities, the shortfall could be met out of the assets of the other sub-funds within the OEIC. However, Jim Hay of Edinburgh Fund Managers says that in this unlikely situation approval would be sought to wind up the sub-fund in question rather than using other assets within the OEIC.

Although designed to be easy to understand, one aspect of OEICs is complex. This is what is known as the "dilution levy" which investors pay into the sub-fund in certain circumstances. This is a mechanism to prevent distortion which effects the value of an investment and has been introduced to ensure equality for investors within the fund.

Sellers would pay it when more orders are being received for the sale of shares than purchases. Buyers would pay it when making large, that is seven-figure, investments.

Although OEICs have no advantages for investors, there are no significant disadvantages. So, why are they being introduced? Investors on the Continent and in the United States are unfamiliar with the trustee structure of unit trusts. The aim, therefore, is to enable UK companies to sell OICS to buyers across Europe. Apart from structure differences, they are just another collective investment vehicle with a funny name.