Unit Trusts and OEICs

A unit trust is legally a trust. A trustee holds the assets, a manager runs them, and what you own is units. An OEIC is a company. A depositary holds the assets, an authorised corporate director runs them, and what you own is shares.

In practice the distinction rarely affects you. Both are authorised and regulated by the Financial Conduct Authority, both keep investors’ assets separate from the manager’s own money, and both are valued and dealt in much the same way. The OEIC structure was introduced partly because it was more familiar to investors elsewhere in Europe, which is why newer funds tend to be OEICs and long established ones are often still unit trusts. Pricing conventions used to differ more than they do now.

A fund is valued once a day at a set valuation point. Orders are dealt at the next valuation point after they are received, which is called forward pricing, so you do not know the exact price at the moment you place the trade. Proceeds from a sale usually settle a few working days later.

Where a fund sees unusually heavy buying or selling, the manager may apply a dilution adjustment to the price so the investor doing the trading bears the dealing costs rather than everybody else in the fund. Funds holding assets that cannot be sold quickly, commercial property being the obvious case, may impose a notice period or suspend dealing in stressed conditions. That has happened more than once in the UK property sector, and it matters if you might need the money at short notice.

Most funds come in two versions of the same portfolio. Income units or shares pay the income out to you as it arises. Accumulation units keep it in the fund and reflect it in the price instead. The underlying investments are identical. The choice is simply whether you want the money now or want it reinvested.

If you hold accumulation units outside a tax wrapper, the reinvested income is still taxable in the year it arises even though it never reaches your bank account, and it increases your base cost for capital gains purposes. That is easy to overlook and awkward to reconstruct years later, so keep the annual statements.

The ongoing charges figure covers the manager’s fee and the fund’s running costs. It does not include the cost of the fund buying and selling investments inside the portfolio, which is disclosed separately. On top of the fund there is usually a platform or custody charge, plus any fee for advice.

Charges compound against you in the same way returns compound for you, so a difference that looks trivial over a single year is not trivial over twenty. That said, the cheapest fund is not automatically the right one. What matters is whether the fund is doing a job your portfolio actually needs.

Held inside a stocks and shares ISA or a pension, the income and gains from these funds are sheltered. Held directly, they are not.

Equity funds pay dividend distributions, taxed as dividend income with the dividend allowance available first. Funds holding mostly bonds and cash pay interest distributions, which are taxed as savings income instead. Selling, or switching from one fund to another, counts as a disposal for capital gains tax even where the money never leaves the platform. That last point catches people out regularly, particularly after a rebalance, and it is one reason we look at where holdings sit before we look at what they hold.

The questions that actually matter are how much fluctuation you can live with and how long the money is being invested for. Whether you need income from it comes next. Past performance tables are the least useful part of the exercise, because a fund at the top of one may simply sit in a sector that has had a good run.

Understanding what a fund holds, how it behaved when markets last fell, and what it costs will tell you more than a star rating. So will knowing whether you are paying an active manager to make decisions or paying far less to track an index.

Heritage is a small family run firm in Taunton, advising people across Somerset and the South West since 2000. We are directly authorised by the Financial Conduct Authority under firm reference 624976, and being independent we can select from funds across the whole market rather than from a restricted list. If you have accumulated a collection of funds over the years and are no longer sure they fit together, that is a sensible thing to have reviewed.