Why choose ITs over OEICs?

[EviesDad]

OEIC,s get FSCS protection which IT,s do not. Probably not a major issue but may be of a concern to some.

[AndrewInDevon]

Some thoughts in addition to the thingsalready said about the differences between funds and ITs.....

1) People seem to obsess about legal form, such as funds, ITs and ETFs. Legal structure is second order compared to investment strategy. I hold funds, ITs and ETFs - I selected the strategy I liked rather than a legal form.

2) Compared to funds and ETFs, ITs are relatively small in terms of AUM. That reflects their closed nature of course, but it also says something. Money has poured into funds and ETFs, whereas ITs have lagged.

3) The IT structure is great for infrastructure, renewables and property, ie operating/managing real assets, where you need an incorporated vehicle to pool activity but I am less and less convinced about them as vehicles to manage equity funds. Then again these sectors produce NAV calcuations which may be less reliable, so what does the premium/discount signal tell us - fact or fiction, or both?

3) ITs, as a legal form, have the appearance to me of shell companies (a company/board of directors) who subcontract delivery to fund managers (eg City is Janus Henderson, Merchants is Allianz and Alliance is WTW). These fund managers are the real powerhouse, City Trust have zero employees, everything is outsourced to third parties. The hired fund manager employ a lot of experts/egos and are the substance of the trust, not the legal vehicle that is the IT. In theory the Board of Directors of City Trust engage Janus Henderson etc, but in practise I suspect it's the fund manager driving the whole show, including sourcing directors. With no staff City Trust has no resource to effectively manage their appointed and sophisticated fund manager, they will relay on their manager and appointed professionals (reminds me of being a pension fund trustee - a hopeless cause as the trustees had been captured by the professionals at the fee trough). So there's something illusory about the nature of ITs as entities. It would take an exceptionally strong IT Board to sack its manager, which I am sure has happened, but probably too late and too little.

[elephanthunt11]

There are pros and cons to both.

As I understand things, OEICs are simpler. You give them your money, they go buy stock in the stated proportions, allocate you units of the OEIC and that's about it. Fairly simple and elegant. However, given the mechanism of buying and selling, it means that if a OEIC has exposure to PE or illiquid assets, it means that should client redemptions happen at a rate higher than expected, the fund may block investors from withdrawing cash as it's dependent on the sale of unlisted assets. Think Neil Woodford scandal.

ITs are a different beast. Again with pros and cons. Firstly, the number of shares is fixed, meaning that you buy and sell shares from other investors on the open market, you do not deal directly with the IT.

If an IT has illiquid assets, and the market is turning for the ngative, well, the IT is under no compulsion to sell that holding. If investors disapprove, they sell their shares to another investor, they don't redeem them with the trust.

ITs can take on gearing (margin effectively). This can be used to enhance gains, naturally, gearing works both ways. This is an important factor for ITs.

Lastly, ITs trade on the open market meaning that their shares' value is not necessarily defined only by the underlying asset, sentiment also plays a part in the share price of ITs. Therefore, an IT can trade at a premium or a discount to its NAV, adding a further layer of market risk. Investors like buying ITs as one can often pick them up at a discount to NAV and you're in theory getting something for nothing, naturally, to realise any benefit, the discount gap must be shorted, bringing the SP back to NAV, this can be done through buybacks or improving market conditions.

ITs are actively managed, OEIC are not necessarily as they can be both passive and active.

I will say - there is a huge bias on this website to ITs and I understand why, but asking here if ITs are better is almost like asking a barber if you need a haircut...

[1nvest]

The real advantage was that advisers got a commission from unit trusts, usually 3% and possibly an annual "trailing" commission. They got nothing from investment trusts.

So IT's in not paying commissions - can provide their investors with more reward.