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COA: Investment and Fund Administration > 10.) Collective Investment Schemes > Flashcards

10.) Collective Investment Schemes Flashcards

1
Q

Define what will determine, and give examples of, the types of securities included in the fund of a collective investment scheme

A

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

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2
Q

Describe why an investor would want to invest money into a Collective Investment Scheme (CIS)

A

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.

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3
Q

Define a collective investment schemes (CIS)

A

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.

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4
Q

Define the benefits of investing in a Collective Investment Scheme (CIS)

A

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

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5
Q

Define the drawbacks of investing in a Collective Investment Scheme (CIS)

A

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

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6
Q

Define the 2 types of capital structures for all Collective Investment Schemes (CIS)

A

Open Ended Funds

Closed Ended Funds

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7
Q

Define the features of the Collective Investment Scheme (CIS) capital structure known as ‘Open Ended Funds’

A

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

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8
Q

Define the acronym NAV

A

Net Asset Value

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9
Q

Define what will determine whether an investor receives shares or units in the fund of a collective investment scheme

A

Whether an investor receives shares or units in the fund depends on the exact legal structure of the fund.

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10
Q

Define the features of the Collective Investment Scheme (CIS) capital structure known as ‘Closed Ended Funds’

A

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

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11
Q

Define how the structure of an open-ended fund of a collective investment scheme may affect whether the investor receives units or shares

A

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

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12
Q

Define whether an investor will receive shares or units in the fund of a collective investment scheme if said fund is ‘closed-ended’

A

Closed ended shares are usually corporate structures only, and will therefore issue only shares

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13
Q

Compare the features of ‘Open-Ended Funds’ and ‘Closed-Ended Funds’, both capital structures of Collective Investment Schemes (CIS)

A

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

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14
Q

Define the different types of Collective Investment Scheme (CIS) available to an investor

A

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

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15
Q

Define unit trusts, an open-ended fund and type of Collective Investment Scheme (CIS) available to investors

A

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

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16
Q

Define Open Ended Investment Companies (OEICs), an open-ended fund and a type of Collective Investment Scheme (CIS) available to investors

A

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

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17
Q

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

A

European equivalent is called an Undertaking for Collective Investments in Transferable Securities (UCITS) and can be freely marketed within any country in the EC

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18
Q

Define the acronym UCITS

A

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

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19
Q

Define the acronym OEICs

A

Open Ended Investment Companies (OEICs)

An open-ended fund and a type of Collective Investment Scheme (CIS) available to investors

20
Q

Define Investment Companies and Investment Trusts, a closed-ended fund and a type of Collective Investment Scheme (CIS) available to investors

A

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

21
Q

Define the acronym NAV

A

Net Asset Value

22
Q

Define Net Asset Value (NAV)

A

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.

23
Q

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

A

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

24
Q

Define the different types of funds available to an investor in a Collective Investment Scheme (CIS)

A

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

25
Q

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

A

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

26
Q

Define the 2 categories that public retail funds can be classified as in Jersey, and the regulation that is behind such a move

A

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.

27
Q

Define the 2 types of fund that public retail funds are classified as in Jersey, and describe the features of each

A

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

28
Q

Define Unclassified funds, one of the 2 types of fund that public retail funds are classified as in Jersey, and describe it’s features

A

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

29
Q

Define Recognised funds, one of the 2 types of fund that public retail funds are classified as in Jersey, and describe it’s features

A

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)

30
Q

Define when and why the Channel Islands was granted the status of a ‘designated territory’

A

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

31
Q

Define expert funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features

A

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:

  1. ) Net worth = One million dollars
  2. ) Minimum investment = one hundred thousand dollars
  3. ) 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

32
Q

Define private funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features

A

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

33
Q

Define limited partnerships, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features

A

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

34
Q

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

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

35
Q

Define indexed funds (tracker funds), a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features

A

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

36
Q

Define exchange traded funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features

A

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

37
Q

Define property funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features

A

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:

  1. ) immovables to a maximum of 80% of fund
  2. ) transferable securities to a maximum of 80% of fund
  3. ) property related warrants to a maximum of 5% of the fund

Transferable securities are limited to:

  1. ) property related shares
  2. ) gilts and other public securities (maximum 35%)
  3. ) units in unit trusts (maximum 5%)
38
Q

Define feeder funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features

A

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

39
Q

Define money market funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features

A

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

40
Q

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

A

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

41
Q

Define roll up fund, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features

A

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

42
Q

Define securities fund, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features

A

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

43
Q

Define umbrella fund, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features

A

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

44
Q

Define venture capital, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features

A

(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

45
Q

Define hedge funds, a type of fund available to an investor in a Collective Investment Scheme (CIS), and it’s features

A

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

46
Q

Define one of the main advantages of Collective Investment Schemes (CIS)

A

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)

COA: Investment and Fund Administration (15 decks)

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