OIEC or IT?

[ivahunch]

On balance I have tended to believe that investment trusts are better than OIECs for various reasons e.g. limit pricing, independent board, gearing, etc. What do others think?

[Arborbridge]

On balance I have tended to believe that investment trusts are better than OIECs for various reasons e.g. limit pricing, independent board, gearing, etc. What do others think?

It's difficult to be definitive - but mostly I've read that ITs will perform better over a long period. However, my own results suggest only that you shouldn't write off OEICs as they can perform very well.

Like most average conclusions, any given OEIC might perform better than any particular IT one chooses!

Arb.

[Dod101]

On balance I have tended to believe that investment trusts are better than OIECs for various reasons e.g. limit pricing, independent board, gearing, etc. What do others think?

This subject has been fully discussed over the years and of course there are differing views but my feeling is that ITs are the better choice for all the reasons that Arb and you have mentioned plus a few more. In a market sell off, OEIC's have to sell assets to meet redemptions whereas the portfolio of ITs are unaffected. That is an important distinction if the portfolio is holding hard to sell or illiquid assets such as property or private (non quoted) investments. These can mean that trading can be frozen with an OEIC in some circumstances and investors are unable to get their money out. Both of these points have been illustrated in recent years.

But I think it is above all the transparency of the IT structure that I prefer to the OEIC. As to performance, I simply do not know overall. As Arb tells us, some will point to one as being better than the other in different circumstances.

Dod

[BullDog]

There is no universal truth to answer that question. I have good results from holding both funds and investment trusts. By far my best ever investment has been Fundsmith, an OEIC. One thing I particularly like about ITs though is that they are traded in real time where funds aren't. All other things being equal, when choosing a collective investment, that is the deciding factor that would steer me towards an IT over a fund.

I actually think it's pretty unhelpful to make a universal statement that one type of collective investment is always superior to another. It's just not true.

[Urbandreamer]

While I prefer IT's I'd hesitate to describe them as "better".

Better in what way? If we take general purpose funds/IT's there is some evidence that the ability to borrow "can" over the long term increase returns. However that is subject to survivor bias.
Property funds have been subject to closure as property is relatively liquid, while you can always sell a IT. However is the ability to sell at a bad time a good or bad thing?
Then there is the complexity of discount and premium inherent in IT's. I've known people who avoid them because they just can't accept the concept that they may have to sell at less than par.

I should possibly admit that my costs would go up if I chose OIEC's as my broker caps their fees for other investments.

[tjh290633]

My recollection is that some funds and ITs had the same manager withthe same objectives. I think M&G may have been one such a good few years ago. The IT tended to outperform the then UT for various reasons, including gearing, discount or premium to NAV, and possibly charges.

TJH

[Newroad]

Hi All.

I'm not sure OEIC vs IT is the right question (though I appreciated it was the one in the original post). I would argue ETF vs IT is (I hold both in roughly equal proportion).

Some of the key considerations

Exchange Tradeable: Yes for IT/ETF, no for OEIC (important for me to be able to exchange trade)
Closed or open ended: Closed for IT, "hybrid*" for ETF, open fr OEIC (important if holding illiquid assets)
Gearing: Yes for IT, Yes for some ETF's, not sure about OEIC's (not a big issue for me - cuts both ways)
Additional Costs (other than broker fees): Jurisiction dependent, but generally Zero for ETF's, Stamp Duty for IT's, Percentage for OEIC's (though not as bad as they used to be, I understand)

For my purposes, I conclude

ETF's for commodity stuff, e.g. indexes etc
Investment Trusts for specialist stuff, e.g. active management, illiquid underlying instruments etc

Regards, Newroad

* "Authorised Participants" (a market maker or sorts) can create/destroy units if and as needed, but I view them more broadly as nearer closed end

[mc2fool]

Gearing: Yes for IT, Yes for some ETF's, not sure about OEIC's (not a big issue for me - cuts both ways)

I thought not for OEICs and I'm not sure about ETFs ... which do you think have borrowed to invest? Additional differences are:

Discount/premium: Yes for ITs and ETFs. No for OEICs.
Must distribute all dividends: No for ITs. Yes for ETFs and OEICs.

Or to put those the other way:

Always trade at NAV: No for ITs and ETFs. Yes for OEICs
Have a reserve: Yes for ITs. No for ETFs and OEICs.

[Newroad]

Hi Mc2Fool.

Just search up "Leveraged ETF's" - you'll see there's plenty. I personally wouldn't touch them.

On the discount/premium, I regard that as a wash, but you are correct to point it out
On the ability to retain some dividends, that is a good point - some people may particularly like the smoothing/reliability effect

I've just checked - it appears OEIC's cannot leverage

https://www.investorschronicle.co.uk/education/2023/03/14/investment-trusts-101-the-key-differences-between-trusts-and-oeics/

The above article also has other useful info for the original poster.

Regards, Newroad

[simoan]

Gearing: Yes for IT, Yes for some ETF's, not sure about OEIC's (not a big issue for me - cuts both ways)

I thought not for OEICs and I'm not sure about ETFs ... which do you think have borrowed to invest? Additional differences are:

I assume Newroad is referring to leveraged index ETFs that are geared by a multiple of the underlying index. L&G do a 2x FTSE100 index ETF for example.

[Lootman]

Discount/premium: Yes for ITs and ETFs. No for OEICs.

Always trade at NAV: No for ITs and ETFs. Yes for OEICs

ETFs can of course trade at a premium or discount to NAV. But it is unusual for that to significantly happen with major market index ETFs from the big providers like Vanguard and iShares. It is more likely with more narrowly defined ETFs or those that operate in illiquid markets. Or in the occasional and temporary so-called "flash crashes".

So on discounts and premiums I would not lump ETFs in with ITs. They are perhaps somewhere in the middle between ITs and OEICs, and most investors should not need to worry about it if they choose wisely.

ETNs, as opposed to ETFs, should not have premium or discount at all, since the return is contractually guaranteed to be identical with the underlying index. However they are credit instruments and so you are exposed to issuer credit risk, not that I know anyone has lost money on them for that reason.

[mc2fool]

Hi Mc2Fool.

Just search up "Leveraged ETF's" - you'll see there's plenty. I personally wouldn't touch them.

Well ok, yes, but not really the same as "gearing" for ITs which is effected by borrowing to buy more of the underlying.

Leveraged ETFs, AIUI, don't hold any of the underlying stocks of the index they're leveraging but rather a pile of derivatives. Hmmm...ok, there may be debt in margins, etc. But still, kinda different to IT gearing...

[Newroad]

Hi Mc2Fool.

I would have thought that a 2X Leveraged FTSE 100 ETF (as cited above by Simoan) would perform* similarly, if not exactly the same, as an Investment Trust or similar borrowing 100% of equity and investing the now "200%" in the basket of shares which represents the FTSE 100.

Indeed, if the provider of the ETF is not doing so naked, then one presumes that is what they are doing themselves, directly or indirectly.

However, I am not an expert in such things and as noted, have no personal stake in such ETF's, so I could be wrong.

Regards, Newroad

* there are of course frictional costs, potential margin calls etc - this is intended in the broadest sense

[scotia]

I have had a look at a few popular Global ITs and OEICs which I have held for a number of years, and also a Global Tracker ETF.

As others have mentioned, it can be more expensive to hold an OEIC in Hargreaves Lansdown than an IT or ETF. So some years ago I switched from an OEIC to an IT - both UK Equity investments managed by Nick Train. And the result?

My personal view is that there is no clear advantage between ITs and OEICs as investment vehicles.
All data has been taken from Hargreaves Lansdown. Please let me know if I have introduced any errors.