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Unit trusts and OEICs

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13. OEICs - charges

On the previous page we noted that OEIC charges are 'explicit' which means that they are not incorporated in the single price but are added separately and explicitly later. The charges are:

  1. The Initial Charge

    The OEIC may levy an initial charge to cover expenses and commissions. This is shown as an explicit charge on the contract note.

  2. Exit Charges

    A few OEIC providers have replaced initial charges with a sliding scale of exit charges over a number of years.

  3. The Dilution Levy

    Whenever the fund managers have to enter the market to buy or sell securities, they can charge a dilution levy to those investors who have caused the fund to incur dealing costs.

    • If there is a net buying of the OEIC shares by investors, then the managers may have to enter the markets to buy securities for the fund. In doing so they will incur dealing costs.
    • Conversely, if there is net selling of the OEIC shares by investors, the fund managers may have to enter the markets and sell securities to pay for share redemptions and the fund will incur dealing costs.

    In both instances, the fund managers have the choice of charging these dealing costs to the fund (and ergo to existing shareholders who have nothing to do with these costs) or charging them to the actual buyers or sellers whose actions have created these costs.

    The following points should be emphasised:-

    • The dilution levy is a discretionary charge. Some fund management groups choose not to apply it, in which case all dealing costs are borne by the fund and the shareholders as a whole.
    • The dilution levy is paid to the fund. The managers do not profit in any way.
    • The dilution levy is not reflected in the quoted single price of the shares. It is displayed as a separate, explicit charge on the contract note.
  4. The Annual Management Charge

    As with unit trusts, OEICs normally levy an annual management charge to cover operating costs and renewal commissions to intermediaries.

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