10 - The principles of investment Flashcards
What do pragramits use to asset allocation
Long run average rate of returns from relevant asset calasses
What does theoretical approach to asset allocation
Masthematical analysis to obtain risk-return trade off given volatility. (uses historic volatility)
Correlation
What type of judgement do pgramatists use
forward looking
What is efficient frontier
A set of portfolios that have maximum rate of returns for every given level of risk
What are some assumptions of optimisation models
Risk
Historic data
Forecasts
Cost
Implementation
What is stochastic modelling?
Models the outcomes of random changes in variables, generates probabilistic assessment
What is an example of stochastic modelling
Inflation
Interest rates
When is strategic asset allocation for
Long term
How can an advisor create a portfolio once a risk profile has been administered
In order of complexity
Historic data
Adjusted historic data
Stochastic
What must an advisor do when creating a porfolio
Explain why chosen portfolio matches clients requirements
What is top-down investment management?
Determine asset allocation within each world major investment region
Choose sector weightings
Select stock
What is bottom up investment management
Managers select stocks based on own criteria
What are the four fund management styles
Value
GAARP
Momentum
Contraianism
What is value fund management style
Use analysis to identify under-valued businesses
What type of funds typically adopt a ‘value’ management style?
Equity income; income & growth
What is the ‘GAARP’ fund management style?
Find reasonably-priced areas with growth potential
What type of funds typically adopt a ‘GAARP’ management style?
Active growth
What is the ‘momentum’ fund management style?
Relies on tendency for both good + bad performance to persist
What is an example of ‘momentum’ fund management?
Sector rotation: tendency of sectors to do well at different points in economic cycle
What is the ‘contrarianism’ fund management style?
Buck trends to achieve high returns, taking advantage of the majority’s excessive optimism/pessimism
Q
What type of funds typically adopt a ‘contrarian’ management style?
Hedge funds
What is beta?
Market related return
What is alpha
Specific return independent of market
What is overlay strategy
Core portfolio is held and derivatives are used to alter currency
What is a structured product?
Uses derivatives to limit capital risk in return for a lock-in period of up to 6 years
For a structured product, what is ‘hard protection’?
A given return is guaranteed
For a structured product, what is ‘soft protection’?
A
Capital is at risk if a certain threshold is breached e.g. if the index drops 50%
Q
What type of risk is involved with structured products?
Counterparty i.e. failure of the institution from which derivatives are bought
What are the charges of funds
AMC
On going charge figure
Performance fee
Total cost of ownership
How many components should cost be separated into
4
What are the components of costs with investments
Ongoing charges for fund
one off fees
Incidental fees
Transaction fees
What does the regulation of funds mean for investors if management group falls
Investors have no monetary loss - independent custodian holds asset
Q
What detail does the FCA require if a fund advertises its past performance?
Discrete year-by-year performance
What is reputation based on
Performance
Consistency on strategy
What criteria should be considered when choosing investment manager
Relevant experience
Structure and style of investment
Size, access to resources
Quality of staff
cost
Which are more volatile, open or closed-ended funds?
Closed, as they may be geared & the premium/discount to NAV can change
Which are better suited to illiquid asset classes, open or closed-ended funds?
Closed, as it may not be possible to sell illiquid assets in volumes required to meet redemptions in open-ended funds
What is one place to identify companies with strong ESG practices?
FTSE4Good Index Series
how are tracker funds structured?
Usually ETFs but can be investment trusts, unit trusts or OEICs
What are the two ways an ETF can track an index?
‘Physically’ (by holding stocks) or ‘synthetically’ (using derivatives)
What are the two aspects of passive fund selection
Index selection
Structure
What are the two factors when choosing tax wrapper
Client individual tax and financial circumstances
Underlying assets held in tax wrapper
What are the main tax wrappers to consider?
Collective investments (OEICs etc.)
ISAs
Personal pensions / SIPPS
Life assurance bonds (UK/offshore)
Who benefits the most, relatively, from tax relief on pension contribitons?
Higher & additional rate taxpayer
What is the annual exempt amount for gains - investment
£6,000
What are collectives tax wrapper?
Tax efficient hold equity-based investments
-Dividend tax
Gains subject to CGT (When units or shares are sold)
What is an advantage of personal pension
PCLS aged 55 over - draw freely subject to marginal rate of income tax
When is tax free access of investment of life policies
after 7.5 years from inception (75% of 10 years for example)
What is maximum contribution of life policies
£3,600 a year
What does SIPP stand for?
Self-invested personal pension
What happens if a SIPP operator fails?
SCS covers the claim up to £85,000 per person, per firm
How can tax shelter benefits of UK investment bonds be maximised?
Arrange for investor to be a basic-rate taxpayer in the year of encashment
Can you gift investment bonds?
Yes - no Tax to trustees or other individuals
What is an advantage of offshore investment bonds?
They are not subject to UK tax so should grow faster
What are some features of platforms
Reduced paperwork
Choice of funds
Tax wrappers
Allocation across wrappers
Consolidated statements
Portfolio reblanacing
Q
Since 2014, why does the FCA require platform fees to be paid separately & directly?
To improve remuneration transparency and help consumers compare platforms
What is the exception to the FCA’s platform fee rule?
The product provider can pay a rebate to the platform provider IF it is passed on to the consumer in the form of additional units
What is one potential issue with third-party discretionary management services?
If the assets are held in the client’s name, the manager’s actions can trigger CGT liabilities
Where is objectives and principal factors of how portfolio be managed set out
Investment policy statement
If a trust deed has no specific investment powers, what governs the trustees?
Trustee Act 2000
What is a churn?
A switch of investments where the primary aim is to generate income for the adviser
What powers does Trustee Act 2000 give?
Invest as your own provided you have regard to standard suitability & diversification criteria
What are the categories of overall investment objective?
Capital growth
Income
Balance
What are some principles that affect investment strategies
Legal
Nature of liabilities
Cash flow
Taxation
What does a strong positive cash flow into a portfolio mean for a manager?
They can take a long-term view & accept short-term uncertainty / losses
Where is means and frequrency of client reporting contained in
Terms of business letter given to clients
Otherwise agreed in writing
Q
How can an advisor decide if complex new products & services are appropriate investments?
3rd-party advice or external services
What is included in a contract note?
Bargain date & settlement date
Who purchase was made for
Number & price of shares
Full name of share
Charges including stamp duty/SDRT
How often are summary portfolio evaluations usually issued?
Quarterly
What does a summary portfolio evaluation include?
Value at date of last report
Addition of cash/stock
Reduction by each withdrawal
Appreciation or depreciation
New value & date
What are some justifications for switching investments
Change in objectives
Client gives clear instructions
market conditions overweigh initial investment
Consistent underperformance of investment long term
How to reduce CGT on property, collective investment or shares
Transfer to partner - gain CGT exempt ammount - or lower tax
Gain can be offset against other losses
