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The open-ended investment companies in the UK demonstrated a record revenue growth in 2020. Let us take a look into the reasons behind the growth and if the growth is sustainable over a long period.
What are Open-Ended Investment Companies
Open-ended investment companies (OEICs) are the funds structured to invest in equities, bonds, and other securities in the UK. They trade on the London Stock Exchange, and their value depends on the value of the underlying assets. They are termed open-ended as they can create new shares for new investors and cancel shares of investors who exit.
Open-ended investment companies pool the money of investors and invest in diversified securities to reduce the risk. They work on different strategies, including income, growth, small-cap, and large-cap. They are beneficial for investors who do not have the time and expertise to manage their investments actively. Investing in OEICs is also suitable as a retirement plan as it has high liquidity and low investment minimums.
Furthermore, the size of the OEICs varies with investors’ demands. However, they come with high management fees and a longer time horizon than traditional investments. They do not offer tax benefits as well.
Performance of Open-Ended Investment Companies in the UK
The closed-ended equivalents of open-ended investment companies usually outperform them due to the obvious structural differences between the entities. It can be attributed to the high performance of closed-ended investment trusts in benign market conditions, high gearing ratios, discounts, and lowering of gaps between their share prices and net asset values.
However, the real picture has become more evident during the ongoing times of worldwide economic crisis. The discounts widened in volatile markets, and open-ended investment companies outperformed their closed-ended counterparts. It is interesting to note that open-ended investment companies became the fastest growing industry in the UK in 2020, with revenue growth of a whopping 179.4%.
The open-ended investment industry stands at the market size of £248 billion, with over 1,500 businesses. The businesses generated combined revenues of $434.7 billion in 2020, with the next highest industry as supermarkets with $205.9 billion of revenues in the same year. Thus, the revenue of OEICs is on the rise and a fast one at that.
Impact of COVID-19 on Open-Ended Investment Companies
Similar to most other industries, OEICs suffered severe damages on account of COVID-19. The economic uncertainty associated with the coronavirus pandemic wreaked havoc on the stock markets and led to unprecedented sell-offs. OEICs also experienced high volatility and massive outflows. Additionally, lowering the bank rate by the Bank of England, as a measure to boost the economy, also affected the fixed-income funds. As a result, the composition of assets under management of OEICs shifted.
The situation became more worrisome when several open-ended property funds were suspended in March 2020 under the material uncertainty clause of the Financial Conduct Authority. The rising market volatility and uncertainty created a liquidity mismatch in the sector and forced the FCA to suspend such funds to reduce potential harm to investors.
However, the state of affairs has improved for the OEICs. Recently, the Royal Institute of Chartered Surveyors (RICS) lifted the material uncertainty clause from two of the leading open-ended property funds, Columbia Threadneedle and St James’ Place. While withdrawals from nine other open-ended funds remain restricted, the lifting of suspension from two funds has improved sentiments of investors towards properties in the UK and OEICs in general. Thus, the prospects of revenue growth in the UK’s open-ended investment companies appear bright.
Expected Revenue Growth of OEICs
According to a report by IBIS World, the revenues of OEICs shot up in 2020; however, the revenue growth will dampen slightly in the coming years, especially compared to the skyrocketing growth this year. Over the next five years, the revenue of open-ended investment companies will reduce as the UK ends its transitional period away from the EU. The increased regulations around the OEIC industry will also consume a part of the profit margins and may slow down the revenue growth.
On the contrary, several other factors might add to the profit margins of OEICs. The escalated economies of scale are anticipated to bring out higher efficiencies in the funds. The increased productivity, combined with the consolidation of investment management companies, may also take the profit margins up and push the revenue growth.
All in all, the UK’s open-ended investment companies have demonstrated robust performance in challenging economic conditions. They have outperformed many closed-ended investment trusts and have sailed through the intense market volatility.
The exceptionally high revenue growth of OEICs may not be retained in the coming years due to surging regulations and other macroeconomic conditions; yet, the OEIC industry is well-positioned for growth and a bright future.