Understanding Collective Investment Vehicles

While they all share this core idea, their structures, mechanics, and histories differ in important ways.

1. OEICs (Open-Ended Investment Companies) 

Structure & Mechanics 

• A UK-registered company with a fund manager appointed to run it. 

• Investors buy shares directly from the fund, priced at the Net Asset Value (NAV) once a day. 

• “Open-ended” means the number of shares can expand or contract depending on demand. 

• Money flows in → fund issues new shares and invests it. 

• Money flows out → fund cancels shares and sells investments to repay investors. 

History & Evolution 

• Introduced in 1997 to align the UK market with European structures like SICAVs. 

• Designed to simplify the older unit trust model. 

• Quickly became the default for new UK retail funds. 

Current Trends 

• Still widely used for active strategies, including equity, bond, and multi-asset funds. 

• Facing competitive pressure from low-cost passive funds and ETFs. 

• Some providers consolidating ranges to reduce duplication and costs. 

2. Investment Trusts 

Structure & Mechanics 

• A public limited company listed on the London Stock Exchange. 

• Investors buy and sell shares on the exchange, not directly from the trust. 

• “Closed-ended”: fixed number of shares, which trade based on supply and demand. 

• Can borrow money (gearing) to boost returns, but this increases risk. 

• Share price can be higher (premium) or lower (discount) than the Net Asset Value (NAV).

History & Evolution 

• Originated in the UK in 1868 with the Foreign & Colonial Investment Trust. 

• Gave small investors access to diversified global portfolios. 

• Long history of specialist expertise, e.g. in emerging markets or infrastructure. 

Current Trends 

• Out of favour recently due to higher interest rates, widening discounts, and lower retail demand. 

• Some trusts have merged or wound down as the sector is consolidating. 

• Remains strong in specialist areas where closed-ended capital is an advantage. 

3. ETFs (Exchange-Traded Funds) 

Structure & Mechanics 

• A fund listed on a stock exchange, traded like a share throughout the day. 

• Most ETFs are open-ended, using a “creation/redemption” process with authorised participants (big banks or brokers) to keep prices aligned with NAV. 

• Typically track an index, using physical replication (buying the actual securities) or synthetic replication (using derivatives). 

• Very transparent — holdings usually published daily. 

History & Evolution 

• First launched in the US in the early 1990s (SPDR S&P 500 in 1993). 

• Spread globally, quickly becoming popular due to low cost and efficiency. 

• Originally they were simple passive tracker funds. 

Current Trends 

• Now evolving rapidly: 

• Thematic ETFs (AI, clean energy, robotics, healthcare). 

• Income ETFs (targeting dividends or high yield). 

• Active ETFs, combining the liquidity of ETFs with fund manager skill. 

• ESG ETFs, reflecting demand for responsible investing. 

ETFs are now the fastest-growing segment of the fund industry. 

4. Unit Trusts 

Structure & Mechanics 

• A trust rather than a company, investors own “units” in the trust. 

• Open-ended like OEICs: units are created or cancelled based on demand. 

• Historically used dual pricing: a buying price (offer) and a selling price (bid). 

• Valued daily at NAV, though now simpler and more OEIC-like. 

History & Evolution 

• First appeared in the UK in the 1930s, becoming the dominant retail fund structure. 

• Overtaken by OEICs from the late 1990s onwards, partly due to simpler single pricing. 

Current Trends 

• Declining in use with many converted into OEICs. 

• New launches are rare; mainly legacy holdings remain. 

5. Other Collective Vehicles 

Hedge Funds 

• Structure: Usually limited partnerships; investors commit capital to a fund managed by a general partner. 

• Mechanics: Use leverage, derivatives, and short selling. Often charge “2 and 20” fees (2% annual, 20% performance). 

• Evolution: From niche in the 1950s to a $3 trillion+ global industry. 

• Trend: Institutions dominate; retail largely excluded due to risk and regulation. 

Private Equity Funds 

• Structure: Closed-ended limited partnerships with long lock-in periods (often 10 years). 

• Mechanics: Invest in private companies, improve them, then sell. Capital is “called” over time. 

• Evolution: Grew rapidly from the 1980s. 

• Trend: Increasing retail access via listed private equity trusts. 

Property Funds 

• Structure: Can be open-ended or closed-ended. 

• Mechanics: Hold direct real estate assets, which are hard to sell quickly. 

• Evolution: Open-ended property funds faced liquidity crises (Brexit 2016, COVID-19 2020). 

• Trend: Shift towards closed-ended investment trust models to avoid liquidity mismatch. 

Fund-of-Funds / Multi-Manager 

• Structure: A fund that invests in other funds. 

• Mechanics: Provides diversification across managers, styles, and asset classes. 

• Evolution: Popular in the 2000s as an outsourcing solution. 

• Trend: Less fashionable today due to higher costs compared with building low-cost ETF portfolios. 

Comparative Snapshot 

Hamilton Summary

The mechanics of each vehicle shape its strengths and weaknesses. 

• OEICs and unit trusts allow easy access, but must sell assets if investors withdraw. 

• Investment trusts and private equity funds benefit from permanent capital but may trade at a discount. 

• ETFs combine liquidity, transparency, and low cost and are now the most innovative segment. 

The industry continues to evolve: 

• Investment trusts consolidating under pressure. 

• ETFs branching into active, thematic, and sustainable strategies. 

• OEICs still central to retail investing, but adapting to a more competitive world.