10.) Collective Investment Schemes Flashcards

Question

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

Answer 1

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

Answer 2

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.

Answer 3

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

Answer 4

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

Answer 5

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)

Answer 6

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

Answer 7

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

Answer 8

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

Answer 9

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

Answer 10

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

Answer 11

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

Answer 12

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

Answer 13

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%)

Answer 14

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

Answer 15

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

Answer 16

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

Answer 17

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

Answer 18

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

Answer 19

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

Answer 20

(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

Answer 21

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

Answer 22

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)