07. Indirect investments Flashcards
Name 4 benefits of investing in collective investment schemes.
- Can invest smaller sums of money that are pooled into larger funds.
- Investments at a lower cost than if they had acted on their own.
- Investors can achieve a balanced & diversified portfolio.
- Professional fund managers make the decisions.
Name 4 investment sector groups.
- Capital protection.
- Income.
- Growth.
- Absolute return.
In general, funds must invest at least ~ of their assets in the relevant asset class.
80%
To qualify as an income fund, each fund in the sector must achieve a yield of not less than ~ of the relevant index on an annual basis.
90%
Unit Trusts
- Legal structure?
- Independent oversight?
- Run by?
- Pricing?
- Trust.
- Trustee(s).
- Fund Manager.
- Dual priced.
OEICs
- Legal structure?
- Independent oversight?
- Run by?
- Pricing?
- Company.
- Depository.
- Authorised Corporate Director (ACD).
- Single priced.
Unit Trusts / OEICs are ~ ended whereas Investment Trusts are ~ ended.
- open
- closed
Unit Trusts / OEICs are priced to ~ whereas Investment Trusts are priced by ~~~.
- NAV
- supply & demand.
Unit Trusts / OEICs are generally ~ charged whereas Investment Trusts are generally ~ charged.
- higher
- lower
Unit Trusts / OEICs are often ~ share class whereas Investment Trusts are ~~~.
- one share class
- different share classes.
Unit Trusts / OEICs borrowing ~~~ whereas Investment Trusts ~~~.
- capped at 10%
- can gear significantly.
Unit Trusts / OEICs are often ~ investments whereas Investment Trusts are often more ~ investments.
- mainstream
- specialised
Open ended: shares are ~ / ~.
Closed ended: shares are ~~ / ~~.
- created / cancelled.
- not created / cancelled (finite).
What is the minimum number of holdings for OEICs / Unit Trusts under the diversification rules?
16
- Max 10% in up to 4 companies.
- Max 5% for other 12 companies.
UK UCITS schemes established as replicating tracker funds can hold up to ~ of the value of the fund in the shares of one company and, where justified by exceptional circumstance, upto~.
- 20%
- 35%
Funds investing more than ~ in Govt. FISs issued by a single issuer are required to invest in at least ~ different issues of stock and no single stock holding can exceed ~ of the value of the fund.
- 35%
- 6
- 30%
UK UCITS schemes can hold up too ~ of the fund’s value in unlisted securities and up to ~ in units of another collective investment scheme.
(~ and ~ for non-UK UCITS schemes).
- 10%
- 20%
- 20%
- 35%
Most funds hold around ~ of a fund’s assets in cash (max allowed ~).
- 5%
- 20%.
What are UCITS funds borrowing limits?
Up to 10% of fund on a:
- temporary basis against future known cashflows (Retail UCITS).
- permanent rolling basis (Non-retail UCITS).
Unit Trust trustees are often a ~ or ~~~, must be ~ of the management firm and are the ~~s of the trust’s assets.
- bank or large insurance company
- independent
- legal owners
Which document outlines the rules regarding the manager fulfilling their obligations/investment objectives?
- Trust deed.
What are the 3 levels of protection for Unit trust unit holders?
- Trustees.
- Regulatory organisations.
- Complaints & arbitration procedures.
What is an equalisation payment?
A partial refund of the original capital invested and is not subject to income tax. Also, deducted from purchase price for CGT purposes.
How often is unit trust income usually distributed?
Half yearly.
The fund manager & ACD manages the trust’s ~ in return for an ~~~.
- assets
- annual management fee.
The fund manager & ACD must be an ~~
- authorised person.
OEICs operate under a ~~ structure.
- limited company
Unit Trusts & OEICs are priced ~ per day and are priced to their ~.
- once
- NAV.
Unit Trusts & OEICs can operate on a ~ basis or a ~ basis.
- historic (where any deal takes the price at the last valuation point)
- forward (where any deal takes the price at the next valuation point).
OEICs are often ~ priced and Unit trusts are often ~ priced.
- single
- dual
Dual priced funds offer a ~~~ which is typically around ~.
- “bid-offer” spread.
- 5%
OEIC/Unit Trust investor taxation rules
Non equity based:
- 60%+ assets must be in in interest bearing securities.
- PSA, 20% / 40% / 45%.
Equity based:
- <60% of assets in interest bearing securities.
- DA, 8.75% / 33.75% / 39.35%
Gains from Unit Trusts & OEICs are taxed ~.
- normally.
What is ‘box management’?
The term used to describe the stock control mechanism applied by managers in the buying and selling of units. (Units held in a ‘box’).
Unit trusts my be priced on either a ~ or ~ basis.
- forward (price calculated at next valuation point) [more common]
- historic (price calculated at last valuation point).
Name 5 types of charges for UTs.
- Initial charge.
- Annual management fee.
- Performance fee.
- Exit charge.
- Other fees e.g. legal & audit.
Name 2 advantages of OEICs.
- OEICs are the most popular collective investment type so can be marketed internationally.
- They permit multiple share classes which allows more flexible charging and currency structures than is possible with UTs.
Describe:
- Fund of funds
- Manager of managers
- Different investment funds used to diversify.
- Manager appointed to choose different management groups to manage asset classes (more cost).
In fund of funds what are:
- Fettered arrangements?
- Unfettered arrangements?
- In-house, lower cost & choice.
- External, more cost & choice.
Offshore funds Reporting
- Must ~~~~.
- Do UK rules apply?
- Report income to HMRC.
- Yes (income tax, div.s, CGT).
Offshore funds Non-reporting
- Doesn’t meet ~~~.
- Do UK rules apply?
- What happens to income?
- Gains calculated on ~~ but charged to ~~ without the use of the ~~.
- reporting fund requirements.
- UK rules not permitted.
- Gross rolled up (taxed in full at maturity).
- CGT principles
- income tax
- CGT exemption.
In what scenario might non-reporting funds be beneficial?
For those who expect to be in a lower tax bracket on maturity e.g. retirees.
An Investment trust is a ~ that invests in other companies and is regulated by ~ law.
- PLC
- company
Who runs an Investment trust?
An independent board of directors responsible for looking after the interests of shareholders.
Investment trusts often invest in specialised areas. Name 2.
- Property.
- Private equity investments.
Name 3 reasons why Investment trusts are seen as riskier than Unit trusts & OEICs.
- Invest in more specialist areas.
- Trade independent from their NAV.
- Often gear more.
Investment trust trading can trade at either a ~ or a ~, and can also be ~ or ~.
- premium
- discount
- diluted
- undiluted
Narrowing discounts are ~ for the investor and widening discounts are ~.
- good
- bad.
Whether Investment trust trading is diluted or undiluted depends on any what?
- Warrants outstanding / taken up.
Under Investment trusts, what are warrants?
- The option to buy more shares at a fixed price in the future (a “sweetener” for investors).
When Investment trust warranties are exercised, what will they do to the NAV?
- Dilute it.
Name 3 Investment Trust structures.
- Conventional.
- Limited life.
- Split capital.
What is a limited life IT?
After a period of time the shareholders are asked whether to wind up the IT or not, and if not then life extended by 3 years typically.
What is a benefit to investors of a limited life IT?
In theory, It helps to reduce the discount as the winding-up date draws near, the discount will narrow because investors could obtain the full value of a trust’s assets if they voted to wind up the trust.
Conventional investment trusts vs split capital
- Single share class vs multiple share classes.
- No fixed term vs fixed term (typically 5-10 years).
Split capital ITs has one portfolio of investments that can produce both ~ and ~.
- growth
- income.
Under split capital investment trusts, what is the hurdle rate?
The annual growth rate required to ensure investors are paid at wind up.
Under split capital investment trusts, what is the asset cover?
The ratio by which the redemption value is currently covered by those available assets of the company.
Name 3 investment strategies for index-tracking funds and briefly describe them.
- Replication (replicate the shares of the index).
- Stratification (sampling).
- Optimisation (using a computerised model).
Stakeholder S&S ISAs annual charge limited to ~ in 1st 10 years then ~ thereafter.
- 1.5%
- 1%
Stakeholder S&S ISA min investment cannot be higher than ~.
- £20.
Stakeholder S&S ISA no more than ~ can be invested in risker assets.
- 60%
Stakeholder Cash ISA min deposit cannot be higher than ~
- £10.
Stakeholder Cash ISA- interest rate that is paid must be no less than ~ below the BoE base rate.
1%
