10.) Collective Investment Schemes Flashcards
Define what will determine, and give examples of, the types of securities included in the fund of a collective investment scheme
The risk profile of the fund will determine the type of securities that are included in the fund and could include:
UK equities
Overseas equities
Government gilts
Cash deposits
Property
Foreign currency deposits
Describe why an investor would want to invest money into a Collective Investment Scheme (CIS)
Private investors will invest in CIS in order to obtain the benefits from stock market investments, without the need for committing large amounts of capital of needing to possess the necessary expertise to review their investments, which they would have to do if they were undertaking direct investments into the underlying securities.
Define a collective investment schemes (CIS)
A collective investment scheme is a type of investment whereby a large number of people ‘pool’ their money in order to obtain a spread of professionally managed securities.
The pool of money becomes a fund, which is invested on behalf of the investors by professional fund managers, in order to achieve the required investment objectives.
When an investor contributes money to the fund, they will receive shares or units in the fund.
Define the benefits of investing in a Collective Investment Scheme (CIS)
Greater diversification can be achieved in the underlying investments so the risk can be spread
Investors can obtain specialist investment expertise
Investors are relieved of administrative burdens
Well regulated
Provide access to specialist markets and overseas investments which are extremely high risk when invested into directly
It is not necessary to possess large amounts of capital, small sums of money can be invested initially
Define the drawbacks of investing in a Collective Investment Scheme (CIS)
Management charges can be high, and can reduce the overall return
The performance of the managed funds relies heavily on the investment expertise of the fund managers
The initial charge can be high
Define the 2 types of capital structures for all Collective Investment Schemes (CIS)
Open Ended Funds
Closed Ended Funds
Define the features of the Collective Investment Scheme (CIS) capital structure known as ‘Open Ended Funds’
The number of shares/units issued is NOT fixed and will continually change as investors purchase new or redeem old holdings
Investors receive shares/units in return for capital invested
Investors buy/sell to the fund direct on demand
Price for the purchase/sale is based on a daily net asset value (NAV) of the fund
Note that Open-Ended funds, which have a corporate structure (open ended investment company), will issue shares. Those that have a trust structure (unit trusts) will issue units
Define the acronym NAV
Net Asset Value
Define what will determine whether an investor receives shares or units in the fund of a collective investment scheme
Whether an investor receives shares or units in the fund depends on the exact legal structure of the fund.
Define the features of the Collective Investment Scheme (CIS) capital structure known as ‘Closed Ended Funds’
The number of shares issued is fixed and will not fluctuate, except where new stock is issued
Investors receive shares for capital invested
Investors buy/sell shares in the market
Price for the purchase/sale is based on demand and supply within the market. As the supply is fixed, demand will usually determine the price
Note that Closed-ended shares are usually corporate structures only, and will therefore issue only shares
Define how the structure of an open-ended fund of a collective investment scheme may affect whether the investor receives units or shares
Open-Ended funds, which have a corporate structure (open ended investment company), will issue shares.
Those that have a trust structure (unit trusts) will issue units
Define whether an investor will receive shares or units in the fund of a collective investment scheme if said fund is ‘closed-ended’
Closed ended shares are usually corporate structures only, and will therefore issue only shares
Compare the features of ‘Open-Ended Funds’ and ‘Closed-Ended Funds’, both capital structures of Collective Investment Schemes (CIS)
In OPEN ended funds, the number of shares/units issued is NOT fixed and WILL continually change as investors purchase new or redeem old holdings
..whereas in CLOSED ended funds the number of shares IS fixed and WILL NOT change, except when new stock is issued
In OPEN ended funds, Investors receive shares/units in return for capital invested
..In CLOSED ended funds, investors just receive shares
In an OPEN ended fund, investors buy/sell to the fund direct on demand
..In a CLOSED ended fund, investors buy/sell shares in the market
In an OPEN ended fund, price for the purchase/sale is based on a daily net asset value (NAV) of the fund
..In a CLOSED ended fund, price for the purchase/sale is based on demand and supply within the market. As the supply is fixed, demand will usually determine the price
Define the different types of Collective Investment Scheme (CIS) available to an investor
Open Ended funds - Unit trusts
Open ended funds - open ended investment companies (OEICS)
Closed ended funds - investment companies and investment trusts
Split capital investment companies
Define unit trusts, an open-ended fund and type of Collective Investment Scheme (CIS) available to investors
Adhere to a trust deed, which lays down the main aspects of the trust
Trustees oversee the operations of the managers, helping to ensure that investor’s interests are looked after
Note that investors in open-ended funds with a unit trust structure will receive units, in exchange for capital invested
Define Open Ended Investment Companies (OEICs), an open-ended fund and a type of Collective Investment Scheme (CIS) available to investors
Hybrid between an investment company and a unit trust
U.K. OEIC can be freely sold all over Europe
Operates on single pricing - buyers and sellers deal at the same price
Fund is a company rather than a trust and is governed by company law
It has strict borrowing powers
Usually has a depositary who looks after the assets and performs the function/duties of the custodian/trustee
European equivalent is called an Undertaking for Collective Investments in Transferable Securities (UCITS) and can be freely marketed within any country in the EC
Define the European equivalent of Open Ended Investment Companies (OEICs), an open-ended fund and a type of Collective Investment Scheme (CIS) available to investors
European equivalent is called an Undertaking for Collective Investments in Transferable Securities (UCITS) and can be freely marketed within any country in the EC
Define the acronym UCITS
Collective Investments in Transferable Securities (UCITS)
The European equivalent of Open Ended Investment Companies (OEICs), an open-ended fund and a type of Collective Investment Scheme (CIS) available to investors
Define the acronym OEICs
Open Ended Investment Companies (OEICs)
An open-ended fund and a type of Collective Investment Scheme (CIS) available to investors
Define Investment Companies and Investment Trusts, a closed-ended fund and a type of Collective Investment Scheme (CIS) available to investors
Greater borrowing powers than a unit trust
Price of shares are governed by supply and demand - Net Asset Value (NAV) is indication only
Shares purchased through a broker
Fund usually distributes all income
Aimed at more knowledgeable investors and institutions
Shares are sold at a discount or premium to NAV because the higher the demand, the higher the price and good performance of the fund can also create higher demand
Define the acronym NAV
Net Asset Value
Define Net Asset Value (NAV)
A mutual fund’s price per share or exchange-traded fund’s (ETF) per-share value.
In both cases, the per-share dollar amount of the fund is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding.
Define Split Capital Investment Companies, a type of Collective Investment Scheme (CIS) available to investors, and the different classes of shares that are available as part of the fund of said CIS
Have a capital structure that can provide for the specific end of the investor
Fund usually has different classes of shares available:
1.) Zero-dividend preference shares:
Issues at a price below their par value
On redemption, will redeem at the predetermined redemption value, provided sufficient assets are available
Redemption will take priority over redemption of other classes of shares, but they rank after payment of any loan stock
2.) Income shares
All the income accrued is paid out by way of a dividend to the holders of income shares
On winding up, the income shares are redeemed at a predetermined capital value, which may not be the par value
3.) Capital shares
Receive little or no income during the life of the investment company
On winding up, the shareholder receives all the remaining after all prior loans and classes of shares have been repaid
Define the different types of funds available to an investor in a Collective Investment Scheme (CIS)
Offshore funds (recognised fund or unclassified fund)
Expert funds
Private funds
Limited partnerships
Indexed funds (Tracker funds)
Exchange traded funds
Property fund
Feeder funds
Money market fund
Managed fund, or fund of funds
Roll up fund
Securities fund
Umbrella fund
Venture capital
Hedge funds
Define offshore funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and briefly describe the benefits of investing offshore
Offshore funds are funds which are run from offshore jurisdictions (e.g. Channel Islands, Isle of Man, Cayman Islands, etc).
In Jersey, public retail funds are classified as either being a Recognised fund, or an Unclassified fund.
Benefits available to an investor investing offshore include:
Tax advantages for non-resident investors
Expertise
Confidentiality
Well-regulated markets
Define the 2 categories that public retail funds can be classified as in Jersey, and the regulation that is behind such a move
In Jersey, public retail funds are classified as either being a Recognised fund, or an Unclassified fund.
Regulation is based on local legislation, but is influenced by the UK’s Financial Services and Markets Act 2000, though the act itself isn’t legally binding in offshore centres.
Define the 2 types of fund that public retail funds are classified as in Jersey, and describe the features of each
1.) Recognised Funds:
Can be freely marketed in the UK
The rules for these funds are set out in the Collective Investment Funds (Recognised Funds Rules) Jersey Order 2003
The investment and borrowing restrictions for a Recognised fund are set out in The Order 2003
The funds can only take the form of a unit trust or open ended security company
Categories for a Jersey Registered fund include:
Securities fund Money market fund Futures and options fund Geared futures and options fund Property fund Warrant fund Feeder fund Fund of funds Umbrella fund
(Note that many are similar to the types of funds available to an investor in a Collective Investment Scheme (CIS)
2.) Unclassified fund
The funds can be ope or closed ended and may have a corporate or unit trust structure
Have more flexible investments restrictions and borrowing powers
Define Unclassified funds, one of the 2 types of fund that public retail funds are classified as in Jersey, and describe it’s features
The funds can be ope or closed ended and may have a corporate or unit trust structure
Have more flexible investments restrictions and borrowing powers
Define Recognised funds, one of the 2 types of fund that public retail funds are classified as in Jersey, and describe it’s features
Can be freely marketed in the UK
The rules for these funds are set out in the Collective Investment Funds (Recognised Funds Rules) Jersey Order 2003
The investment and borrowing restrictions for a Recognised fund are set out in The Order 2003
The funds can only take the form of a unit trust or open ended security company
Categories for a Jersey Registered fund include:
Securities fund Money market fund Futures and options fund Geared futures and options fund Property fund Warrant fund Feeder fund Fund of funds Umbrella fund
(Note that many are similar to the types of funds available to an investor in a Collective Investment Scheme (CIS)
Define when and why the Channel Islands was granted the status of a ‘designated territory’
Since 1988, the Channel Islands has been granted the status of a ‘designated territory’.
This status won’t be granted unless the local laws provide investors with protection, which is at least equal to the level of protection afforded by the UK regulatory authorities.
The regulations will cover:
Integrity and financial stability of the fund managers
Ensuring the fund is liquid and well diversified
Pricing of shares/units
Borrowing levels
Define expert funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
Introduced in 2004
Designed to provide a streamlined regulatory approval process with confirmation being given by a Jersey Functionary of the fund, and approval received from the JFSC within 72 hours
Every fund must have a regulated manager or administrator with a physical presence in Jersey
Offers for investment can only be made to expert investors which has a criteria of:
- ) Net worth = One million dollars
- ) Minimum investment = one hundred thousand dollars
- ) Classed as a professional or experienced investor
The prospectus must contain a clear investment warning and investors must sign a document to say that they’ve received and accepted the investment warning
Define private funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
Not governed by the Collective Investment Funds (Jersey) Law 1988
There must be less than 50 offers made to invest in the fund
Minimum investment price = £250,000
Funds are governed by the Control of Borrowing (Jersey) Order 1958
They can only be marketed to institutional or professional investors
Define limited partnerships, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
There must always be at least one partner with limited liability
Limited partner (LP) agrees to put a set amount into the company, which also forms the maximum of their liability. They can be called upon to pay any unpaid amounts to discharge any liabilities. The General Partner (GP) is responsible for any difference
The financing is often drawn down in instalments rather than a lump sum when the Partnership is formed
The GP is a separate entity to the Limited Partnership and receives a management fee from the partnership for the functions it performs
Once a Limited Partnership makes public offers to over 50 persons it becomes a Collective Investment Fund
Compare the responsibilities of a Limited Partner (LP) and a General Partner (GP) in a limited partnership, a type of fund available to an investor in a Collective Investment Scheme (CIS)
A GP:
Has UNLIMITED liability
Holds the assets of the partnership
CAN (and is responsible for) dealing with third parties
Makes investment decisions
Receives management fees and profit share from the partnership
An LP:
Has LIMITED liability
CANNOT deal with third parties
LIMITED involvement with the management of the partnership
Makes capital contributions to the partnership
Receives a share of the profits and dividend income
Note the difference between what an LP and a GP receive as income from the partnership
Define indexed funds (tracker funds), a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
Portfolio will match a particular index, e.g. FTSE 100
Made up of underlying investments which mirror the index to which they are aligned
Funds may underperform when compared direct to the index, this is due to the level of fees and charges levied by the fund
The cost of buying and selling shares in order to match the index can also affect the overall performance of the fund
Define exchange traded funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
Form of investment company where the investment objective is to achieve the same return as a particular index
Similar to an index fund - invests in the securities of companies that are included in a selected market index
Do not sell individual shares directly to investors, but issue shares in large blocks called creation units
Main purchasers are institutional investors, who buy the creation units and then split them up and sell them individual shares on the secondary market. This permits investors to buy individual shares rather than creation units
The value of the shares moves with the value of the fund
Investors sell their shares to other investors on the secondary market
Define property funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
Property can be in the UK or abroad
Must obtain £5million during the initial offer period or the scheme may be revoked
Permissible investments are:
- ) immovables to a maximum of 80% of fund
- ) transferable securities to a maximum of 80% of fund
- ) property related warrants to a maximum of 5% of the fund
Transferable securities are limited to:
- ) property related shares
- ) gilts and other public securities (maximum 35%)
- ) units in unit trusts (maximum 5%)
Define feeder funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
Investors in units of a another fund or investment trust
The fund can invest in products managed by other fund managers
It is a single fund
Fund CANNOT invest in high risk funds
Define money market funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
Fund invests in cash assets
Have a high level of liquidity
Usually single currency
Often used as a holding fund for investors when they’re switching between funds
Define a managed fund, or fund of funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
Fund invests in units of other funds managed by the same fund management company
Allows investors to invest in a wide range of products with one single investment
Portfolio must comprise of 5 different funds
Fund will often have a lower or nil management fee
Investments valued at NAV before initial charge
Define roll up fund, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
Usually consists of fixed income stocks
Income is rolled up into the price, rather than distributed
Fund DOES NOT pay distributions to shareholders
It is a capital growth fund
Often used by investors as part of long term tax planning
Units are NOT accumulation units as no distribution is declared
Fund CANNOT obtain distributor status, as income IS NOT distributed
Define securities fund, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
Fund invests in transferable securities which include investments in:
Shares Debentures Gilts Local authority loan stocks Public authority loan stocks
Investment portfolio may comprise investments in a specific geographical or industrial area
Often a single class fund
Define umbrella fund, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
Single legal entity
Consists of a number of sub-funds
Each sub-fund has its own portfolio and investment policy
Each sub-fund is administered as a single separate fund
Sub-funds can be different currencies
Cheap to administer
Easy to add new sub-funds and to merge existing sub-funds
Single set of documents - prospects, application form, report and account
Define venture capital, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
(Revise by using ‘Venture Bros’)
Aim to provide capital finance for small expanding companies who wouldn’t be able to obtain the funds by listing on the stock market
In return for taking extra risk, the venture capitalists look for substantial equity, a seat on the board
The venture capitalist may provide management and financial support
Look for an exit through a trade sale or floatations of the company within 2-5 years of making the investment
Venture capital trusts are types of investment trusts which invest in small, unquoted companies with assets under £15m, including AIM and OFEX companies, and are designed to attract risk capital from high rate tax payers by giving them tax concessions
Define hedge funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features
Structured as a limited company
Managers tend to be specialists within certain areas of expertise
Assets under management may be capped to ensure that the size of the fund doesn’t become unmanageable
Charge an annual management fee plus an incentive payment to the managers for generating positive returns
The standard minimum investment is often quite large
Have limited life span of 10 years on average
Have wide investment restrictions, and are able to use a number of investment tools
Hedge funds can use short-selling techniques - when the fund sells an asset that it doesn’t hold, in the hope of being able to buy the stock back at a profit in the future
Offer an absolute return rather than seeking to match or exceed a particular benchmark of index
Define one of the main advantages of Collective Investment Schemes (CIS)
The investor can choose to invest in a fund which fulfils their investment objective, whether it is:
Income
Growth (or both)
Sole currency
Or a specific specialist fund (see previous examples)
