UK: Managers set to lobby as OEIC issue provokes debate
It has been a tumultuous few months for UK open ended investment companies (OEICs).
Since the new Labour government announced that foreign income dividends (FIDs) were to be abolished by 1999, the UK fund management industry has been up in arms. 'Hard lobbying' is expected in the lead up to the ban, but as far as amending the structure of funds in the meantime to keep them attractive for investors, the plan is anything but clear. There seems to be no coherent pattern within the industry with some managers forging ahead with OEIC launches and others scuttling off into the distant climes of offshore domiciles such as Dublin, leaving institutional investors wondering if OEIC investments are still a wise move.
The basic appeal of an OEIC to European institutional investors and multinationals in particular, is that it is constructed with a 'European feel' with multiple share classes and currency denominations and a single pricing struture - by omitting entry and bid offer costs which are unfamiliar to continental investors. Current UK unit trusts are unattractive to institutions who are treated under the same fee charging structure as retail investors, thus incurring higher costs than in an offshore fund. And the European market is virtually out of unit trusts' reach, says Alison Ramsdale at Frank Russell: It is an extra barrier to sales as it is a structure which most Europeans are not familiar - they are used to Luxembourg SICAVs, or Dublin VCICs (variable capital in-vestment companies)."
"From our point of view, an OEIC is particularly attractive because it is single priced - it doesn't have a bid price or an offer price as a unit trust does," agrees Dougie Adams, business development manager at Templeton, adding, "There is wider scope to sell these funds round Europe." Templeton, incidentally, is only looking to sell its OEICs into the UK and Irish markets, remaining with its Luxembourg SICAV to serve the continental market.
The removal of FIDs has hit those funds, unit trusts and OEICs alike, who do not have any corporation tax liability, and who must find the 20% extra cost to meet advanced corporation tax (ACT), which they would previously have paid out of FIDs and then claimed back. For those funds, ACT has become an actual cost instead of a cash flow activity. As such, the 20% means a loss of income on certain portfolios which will affect the returns made on investments and could mean extra risks being taken by fund managers to achieve the same returns.
This is enough to deter the likes of Barings who was reported as backing away from OEICs for a rethink of the structure rather than take that risk for its pension fund investors.
To date, Templeton has been joined by Threadneedle and Save & Prosper in the OEIC arena, while Barings is teamed with Perpetual in putting on hold plans to sell OEICS with the latter now considering marketing its offshore funds into the UK market. And consultant Frank Russell, who was on the verge of converting its unit trust into an OEIC at the time of the government announcement, has also thought against it and is considering transferring it offshore to Dublin. The industry is fast splitting into two camps of those who do and those who don't.
For institutional investors still un-sure of what move to make, Alison Michelle, senior policy adviser at the Association of Unit Trusts and Investment Funds (AUTIF) suggests a "wait and see" approach, and implies all is not lost, stating simply, "The FIDs issue is not dead."
She continues: "As a result of the representations made by Autif amongst others during the Finance Bill, the government has agreed to look at the impact on multinationals and on investment companies of a removal of FIDs as we know them, with no promises but at least a willingness to consider the impact and to look at possible ways forward."
However, she admits the current confusion is not likely to end there: "The way it looks as if it is going is not at all clear."
To add to the debate, the issue of OEICs 2 is also causing some concern within the fund management community who feel the government have put the launch of a revised structure onto the back burner, dismissing it as low priority.
"OEICs 2 will create funds, which while they won't comply with the UCITS directive, will allow for funds that invest in instruments such as fu-tures and so on," explains Templeton's Adams. "It will allow for fund-guaranteed type products, and it will allow for interval funds, where you might raise money and then there would be no subscriptions or redemptions for say a year and then there would be a period of subscriptions and redemptions and then it would be closed again."
But Perpetual, one of the managers to put a halt to an OEIC launch thinks the government has been too slow in dealing with the problem. Says Fiach Maguire, personal pensions development manager: "The new government seems not to have attached any sense of urgency into bringing forward the model, the regulations for OEICs 2 which would create the environment that would be necessary for Perpetual to look at them seriously as a vehicle."
He continues: "The new government does not seem particularly anxious about bringing forward any particular area within the whole financial services industry," adding, "There has clearly been no priority given to this project."
"There has been a bit of a hiccup between the first stage of OEICs and the second stage" agrees AUTIF's Michelle. "This maybe having an impact on some of the funds which might want to invest in OEICs be-cause there is only a certain range of them available.""