10. Unit Trusts, OEICs, Investment Trusts Flashcards
Key features of a unit trust? (4)
Created under trust deed with mandate
Fund divided into units; fraction of fund asset value
Open-ended; can create/cancel units
Manager obliged to buy back units from investors
Describe the 3 required roles of a unit trust?
Trustee:
- overall responsibility for investor protection
- hold & control trust assets & income
- approve marketing
Depositary:
- oversight of sale/issue/pricing of units
- carry out instruction of fund manager
- monitor cash flows
Find manager:
- valuing fund assets
- pricing & selling units
What are the 4 prices of a unit trust?
Creation
Offer; investor buys
Bid; investor sells
Cancellation; lower than bid if bought back with little prospect of re-selling
How are adviser fees priced for unit trusts?
Clean/unbundled - separate from fund charge
Adviser has to charge investor directly rather than earning commission from fund
What is an equalisation payment of a unit trust / OEIC?
First dividend received includes element of income generated before purchase - this is stripped out and not taxed
Key features of an OEIC? (5)
PLC created with mandate outlined in prospectus
Share price = fraction of fund assets
Open ended; can create/cancel shares
Manager obliged to buy back shares from investor
Authorised Corporate Director required
What are the investment rules for unit trusts and OEICs? (7)
- cannot borrow long-term debt; limited to short-term debt up to 10% of fund assets
- cannot hold >10% in single quoted co. unless index tracker (20%/35%)
- up to 4 holdings can be held up to 10%, all other holdings must be <5% each
- cannot hold >10% of voting power
- can only invest 5% in unquoted co’s
- funds with >35% govt securities much spread this over 6+ holdings, none of which >30% fund value
- cash can only be held for liquidity (not as investment)
What is the cancellation period for unit trusts and OEICs
14 days
Receive lower of price paid and offer price @ cancellation
What are fettered and un-fettered investment funds?
Fettered; can only invest in internal funds offered by host provider
Un-fettered; can invest in funds offered by other providers
What is the difference between total return and absolute return?
Total; aim to produce positive returns over 3-5yrs, minimising losses
- mainly long positions
- performance measured against cash + x%
- unconstrained; managers can invest in owt
- produce relatively lower returns in strong markets
Absolute; aim to produce positive returns annually
- use short positions and derivatives to maximise opportunities
What is the yield calculation for an investment fund?
latest dividend/distribution - AMC
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offer price
What is the difference between equity and non-equity unit trusts & OEICs?
Equity; <60% assets in interest-bearing securities. Distribute dividends
Non-equity; >60% assets in interest-bearing securities. Distribute interest
What are the 2 types of offshore funds and their tax treatments?
Reporting; income reported to HMRC - investor taxed as if UK fund
Non-reporting; disposal by investor treated as “offshore income gain” and taxed as income (not CGT)
Key features of investment trusts (5)
PLCs
Close-ended; no new shares can be created
More freedom to invest incl gearing
Can keep 15% profits in reserve to smooth out divs
No more than 15% holdings in single company
What are split capital trusts and the order of repayment (5)?
Multiple share classes and fixed winding-up date
Prior charges; not shares - liabilities paid before capital
Zero dividend preference shares
Income shares
Ordinary
Capital
What are the 3 metrics used to assess split capital trusts?
Gross redemption yield; annual return if held until wind-up
Hurdle rate; annual growth rate of trust assets required to meet redemption value
Cover; how many times assets cover redemption value
What is the calculation for diluted NAV?
NAV less warrants and convertible loan stock
What is the CT treatment of an investment fund?
Gains made exempt from CT
Dividends received (franked income) exempt from CT
All other income (unfranked) subject to CT
Can elect to distribute interest received straight to shareholders (ignored for CT) - investor taxed as savings income
