Unit Trusts and OEICs: The Building Blocks of UK Portfolios

Open-ended funds — unit trusts and Open-Ended Investment Companies (OEICs) — are the most widely used investment structures in the UK. They form the core of the vast majority of ISAs, SIPPs, and advised investment portfolios. Understanding how they work — their pricing, their structure, their regulatory protections, and their limitations — is foundational knowledge for any UK investor.

Despite their ubiquity, many investors who hold these funds every day have only a partial understanding of what they actually are and how they operate. The following guide explains the structure, the mechanics, and the important distinctions that affect investment decisions.

What Are Unit Trusts and OEICs?

Both unit trusts and OEICs are open-ended collective investment vehicles: funds that pool money from multiple investors, which is then managed by a professional fund manager to achieve a stated investment objective.

"Open-ended" is the critical structural term. When an investor wants to invest, the fund creates new units (unit trust) or shares (OEIC) and uses the money to purchase additional assets. When an investor wants to redeem, the fund cancels their units/shares and sells a proportionate portion of the portfolio to raise the cash. The number of units or shares in existence expands and contracts with investor flows. This is fundamentally different from a closed-end structure such as an investment trust, where the number of shares is fixed.

The open-ended structure has important consequences: the price of units/shares is always closely tied to the Net Asset Value (NAV) per unit — the market value of the underlying portfolio divided by the number of units in issue. There is no persistent discount or premium to NAV (unlike investment trusts). But it also means the fund manager faces daily redemption pressure — they must hold sufficient liquidity to meet redemptions at any time.

Unit Trusts vs OEICs: The Historical Distinction

The unit trust is the older UK structure, dating to the 1930s. It operates under a trust structure:

• A trustee (typically a major bank or custodian) holds the assets on behalf of investors and ensures the manager operates within the trust deed
• A fund manager (the authorised fund manager) makes investment decisions
• Investors hold units in the trust

Historically, unit trusts used a dual-price system: a higher "offer price" at which you bought units and a lower "bid price" at which you sold — the difference being the "bid-offer spread" (typically 5–6% in early iterations). This spread was a significant transaction cost and has become a source of historical criticism of the structure.

The OEIC (Open-Ended Investment Company) is a more modern UK structure, introduced in the mid-1990s. It operates as a company:

• Regulated under the Open-Ended Investment Companies Regulations 2001
• Has a depositary (equivalent to the trustee) to hold assets and oversee the manager
• Issues shares rather than units to investors
• Uses a single price (the NAV-based price) for both purchases and redemptions

The OEIC's single-price system eliminated the bid-offer spread that characterised the old unit trust model. The UK industry has largely migrated to the OEIC structure, though many legacy unit trusts still exist. For practical purposes, a modern unit trust and an OEIC with daily dealing and a single price are functionally very similar from the investor's perspective.

The Umbrella Structure

Most major fund managers operate an umbrella OEIC — a single authorised investment company that contains multiple sub-funds, each with its own investment mandate, manager, and portfolio.

For example, the "Baillie Gifford" umbrella might contain sub-funds including "Baillie Gifford Global Alpha Growth," "Baillie Gifford UK Equity Alpha," and "Baillie Gifford Positive Change." Each sub-fund is a separate portfolio with its own NAV, but all sit within the same regulatory and administrative umbrella.

For investors, this means you deal with a single KIID and a single fund administrator when switching between sub-funds within the same umbrella. It also provides some administrative efficiency: the umbrella's single set of regulatory approvals covers all sub-funds.

Share Classes: Accumulation vs Income

This is one of the most practically important distinctions for investors and is frequently misunderstood.

Accumulation (Acc) shares: when the fund generates income (dividends from equity holdings, interest from bond holdings), the income is not paid out to investors. Instead, it is automatically reinvested in the fund — used to purchase additional units/shares. The NAV per accumulation share rises to reflect the reinvested income.

Income (Inc) shares: when the fund generates income, it is distributed to investors — paid out to their nominated bank account or held in cash on the platform for reinvestment.

The choice depends on the investor's objective:

For investors in the accumulation phase (building wealth, not needing current income), accumulation shares are typically preferable because:

• Income is automatically reinvested without transaction costs
• Accumulation shares "grow" in price over time, reflecting compounding reinvestment
• If held inside an ISA, the reinvested income stays inside the ISA wrapper; with income shares, distributions must be actively re-invested inside the wrapper if the ISA allowance permits

For investors in the distribution phase (needing current income), income shares are typically preferable because:

• Regular distributions provide visible cash income
• No need to periodically sell shares to fund income needs (which triggers CGT outside a wrapper)

Tax point. For investors holding outside a tax wrapper, both accumulation and income shares create a tax event when income is generated — even for accumulation shares. The income is deemed to have been distributed and reinvested; it is still subject to income tax in the year it arises. A common misconception is that accumulation shares defer income tax — they do not.

Pricing and Dealing Mechanics

OEICs are priced at a single valuation point on each business day — typically at 12 noon for UK equity funds, though the exact time varies by fund. The valuation calculates the current market value of the portfolio, divides by the number of shares in issue, and produces the NAV per share.

Forward pricing: when you submit a deal instruction to buy or sell OEIC shares, you deal at the next valuation point price — the price has not yet been calculated when you submit the order. This is the "forward pricing" principle. You will know the approximate price (yesterday's NAV is public), but the exact execution price is set by tomorrow's noon calculation.

This contrasts with ETFs, which trade on the stock exchange throughout the day at market prices (always close to NAV because of the arbitrage mechanism, but visible in real time). For large institutional transactions or investors who need price certainty, ETFs may be preferable. For most retail investors making regular contributions to long-term holdings, forward pricing is entirely acceptable.

Dealing cut-off times. Each fund has a dealing cut-off: instructions received by 12 noon (or the fund's specified cut-off) deal at that day's price; instructions received after the cut-off deal at the next day's valuation point. For emergency redemptions, this can mean a 24–48 hour delay before you know your exact exit price.

Settlement. OEIC trades typically settle T+3 business days (trade date plus three business days) for redemptions — meaning your cash arrives three business days after the deal. Some funds settle T+2.

Liquidity and the Open-Ended Risk

The open-ended structure's liquidity promise depends on the fund's ability to sell portfolio assets to meet redemptions. For funds investing in highly liquid assets (large-cap equities, gilts), this presents no practical challenge. But funds investing in less liquid assets face a structural tension.

The UK commercial property OEIC sector experienced this tension acutely in 2019–2020 and again in 2022. Commercial properties cannot be sold quickly without significant price concessions. When investors in property OEICs requested large-scale redemptions, the funds could not raise cash quickly enough and were forced to suspend dealing — freezing investors' money for months.

The FCA consulted (in CP20/15, 2020) on requiring open-ended property funds to impose a mandatory redemption notice period of between 90 and 180 days to address this structural mismatch, but as of 2026 those rules have not been brought into force; in the meantime the operative protections remain the manager's ability to suspend dealing and apply fair-value pricing. Investment trusts investing in property face no equivalent problem — their shares trade in the secondary market regardless of the liquidity of the underlying assets.

For UK equity, bond, or global equity OEICs investing in liquid listed securities, this liquidity risk is minimal in normal conditions. Investors should be more cautious about any open-ended fund investing in assets that cannot be quickly liquidated.

The UCITS Framework

Most UK-marketed funds are structured as UCITS funds — authorised under the Undertakings for Collective Investment in Transferable Securities framework. UCITS is a European regulatory framework (now maintained as UK UCITS following Brexit) that sets minimum standards for:

• Diversification: no single asset may represent more than 10% of the fund; the total in positions exceeding 5% may not exceed 40% (the "5/10/40 rule")
• Eligible assets: primarily transferable securities (listed equities and bonds), money market instruments, and derivatives used for hedging or efficient portfolio management
• Liquidity: sufficient liquidity to meet redemptions within defined timeframes
• Transparency: standardised KIID disclosure, regular factsheets, annual and semi-annual reports

UCITS funds offer UK retail investors a well-regulated, transparent investment vehicle with meaningful investor protections. The framework is the reason a UK investor can access a fund managed by a Swiss firm investing in US equities — the UCITS framework creates a standardised structure trusted across jurisdictions.

Practical Guidance for Investors

Choose the right share class. Don't default to the cheapest — check whether accumulation or income matches your cash flow needs. Check whether the share class is in GBP, USD, or hedged — this matters for currency exposure.

Understand what happens to your income. If using accumulation shares outside a wrapper, you still have an income tax event even though you haven't received cash. Ensure you account for this in your tax return.

Know the dealing cut-off. If you ever need to make a same-day deal, the cut-off time matters. Most platforms display the cut-off clearly; if uncertain, call and confirm.

Check the fund's liquidity policy. For any fund investing in property, smaller companies, or less liquid instruments, check whether there is a notice period or dealing suspension history.

Review the ongoing charges. The KIID displays the OCF. Ensure this is competitive with equivalent alternatives and understand what you are receiving for the charge.

How Global Investments Can Help

OEICs and unit trusts are the most practical vehicle for most retail and HNW investors accessing collective investment management. At Global Investments, we help clients select funds appropriate to their investment objectives, risk profile, and tax position, with attention to share class efficiency, cost analysis, and the liquidity characteristics of the underlying portfolio.

Our portfolio construction work considers the full range of UK and internationally domiciled UCITS funds, ensuring clients have access to the most relevant active and passive options across all major asset classes and geographies.

Capital is at risk. The value of fund investments and any income from them can fall as well as rise. You may get back less than you invest. Past performance is not a reliable indicator of future results. Tax treatment depends on individual circumstances. This guide is for information purposes only and does not constitute financial advice.