11. Other investment classes Flashcards
1
Q
Purpose of collective Investment Schemes
A
DATE
- Diversification and lower portfolio risk
- Access to expertise /Access to large/unusual investments
- Tax advantages possible
- Economies of scale
2
Q
What is the purpose of a CIS from the perspective of the management
A
- Follow the stated investment objective
- Create return for investors commensurate with the level of risk taken
3
Q
What is a closed ended scheme
A
- E.g. Investment trust company (ITC)
- Once the initial tranche of money is invested
- fund is closed to new money
- AFter launch => Must purchase shares from willing seller
4
Q
What is an open-ended CIS
A
- E.g. Unit trust or open ended investment company (UTC)
- Managers can create or cance
- Units in the fund as new money is invested
- or disinvested
5
Q
What is NAV per share for an ITC
A
- NAV = V(A)/# of odinary shares
- if gearing is allowed then the underlying assets will be net of debt
6
Q
Regulations of CISs typically cover
A
- Maximum level of gearing
- Categories of assets that can be held
- Unquoted assets can be held?
- Tax relief available
7
Q
Investment and risk characteristics of an investment trust company
A
CISCOS PISO
- Closed-ended
- Investors are shareholders
- Share price is determined by supply and demand
- Can raise both debt and equity capital
- Often quoted on stock exchange
- Share price often stands at a discount to the company’s NAV per share
- Public company, governed by company law
- Investment managers and Directors receive fees
- Stated investment objective written into prospectus
- Operated by company directors and investment managers
8
Q
Investment and risk characteristics of a unit trust
A
LOTTO SUIT
- Limited ability to gear
- Operated by Trustees and a management company
- Trustees to ensure that the managers obey the trust deed and hold the assets in trust for the unit holders.
- Trustees and UT managers receive fees
- Open-ended
- Stated investment objective
- Unit price is based on NAV per unit
- Investors are unitholders
- Trust, governed by trust law
9
Q
What are the advantages of CIS over direct investment
A
- Acces to larger more unusual investments
- Discount to NAV (Bought cheaply) -> ITC only
- Diversification
- Divisibility
- Larger collective schmes can achieve economies of scale
- Higher than expected return due to extra volatility associated with gearing and changes to discount to NAV (ITC only)
- Expertise of investment managers
- Index-tracking of a quoted investment index is possible
- Marketability (possibly)
- Quoted prices making valuation easier
- Suitable for small investors
- Tax advantages (possibly)
10
Q
What are the disadvantages of investing in CIS than direct
A
- Loss of control
- Additional layer of charges
- Extra volatility caused by gearing/discount to NAV changing
- Tax disadvantages
- Need to hold some cash for liquidity which reduces exposure/returns (UT only)
11
Q
What are the reasons why actual share price of ITC would be lower than NAV i.e. share price is at a discount to NAV
A
- Management charges – value of ITC could be PV of dividends after management charges. MC lowers the value of share (to lower than NAV)
- Concerns over marketability – small ITC investing in large company will be less marketable than underlying asset
- Concerns over quality of management – investment managers are poorly rated then investors may not pay adequately
- Market sentiment/fashion – ITC may be out of fashion
12
Q
Main uses of derivatives
A
- Aiming to achieve higher returns (Speculation)
- Providing protection against the risk of adverse market movements (Hedging)
- Allowing financial institutions to alter the structure of their portfolios without needing to trade in the underlying assets
13
Q
Fundamental and practical problems with overseas investment
A
MTV (fundamental) CATERPILLAR (practical)
- Mismatching domestic liabilities
- Taxation (May not be able to recover withholding taxes paid)
- Volatility of currency
- Custodian needed
- Additional admin required
- Time delays
- Expenses incurred/Expertise needed
- Regulation poor
- Political instability
- Information harder to obtain
- Language difficulties
- Liquidity problems
- Accounting differences
- Restriction on foreign ownership/Repatriation problems
14
Q
What is a long (short) position
A
- Positive (negative) economic exposure to the asset
- Take (make) delivery of the asset
15
Q
Define the following:
* Call option
* Put option
* Option writer
* Option holder
* Option premium
* Exercise or strike price
* Traded option
* American option
* European option
A
- Call option - right not obligation to buy speicifed asset at a specified price and future date
- Put option - …sell…
- Option writer - issuer or seller of the option
- Option holder - buyer…
- Option premium - price paid for the option to the option writer
- Exercise or strike price - price at which an underlying securiyt can be sold to (put) or purchased from (call) the option writer
- (Exchange) Traded or OTC option - Option contracts with standard features actively traded on organised exchangeds
- American option - Option that can be exercised on any date before its expiry
- European option - can only be exercised at expiry
16
Q
Factors to consider when investing in emerging markets
A
PHARMER CCMCP
Cats Can Make Cute Pets
- Possibility of rapid economic growth
- Higher expected return
- Availability and quality of information
- Restrictions on foreign investment
- Market regulation
- Extra diversification
- Range of companies available
- Current market valuation of the asset
- Currency stability and strength
- Marketability
- Communication problems
- Political stability
17
Q
What is a future
A
- Standardised, stock exchange tradable contract to buy or sell an underlying asset at a predetermined price at a predetermined date in the future
- Standardise
- Exchange traded
- Clearing house removes default risk
- Margin paid to clearing house
- More liquid
- Quoted price
- Often closed out before delivery
18
Q
What is a forward
A
- Non-standardised, OTC to buy or sell…
- Tailor-made, non standardised
- OTC traded
- Default risk depends on counter party
- No margin paid as traded OTC
- Less liquid
- No quoted price as traded OTC
- Often results in delivery
19
Q
What is a warrant
A
- Option issued by a company over its own shares
- Holder has the right to purchase share of the company
- At a specified price and time in the future
20
Q
Why would an investor invest overseas
A
- Matching liabilities in a foreign currency
- Diversification by country, industry, stock market => reduce portfolio risk
- Higher expected return if:
1. Fair compensation for additional risk involved
2. Result of exploiting inefficiencies => Undervalued stock, market, currency
21
Q
What are ways of indirectly investing in overseas market
A
- Investment in multinational companies based in home country
- Investment in CIS specialising in overseas investment
- Investment in derivatives based on overseas assets
22
Q
What are the relative merits of investing indirectly in overseas by investment in multinational companies based in the home market
A
- easier to deal in familiar market
- +multinational companies have expertise and conduct business in most profitable areas overseas
- +gives access to areas where direct investment may be difficult
- -overseas earnings are diluted by domestic earnings
- -Investor has no choice in where company tracts its business
23
Q
What are the attactions of investment in emerging markets
A
- Inefficient markets; buy cheaply
- perceived to be risk; buy cheaply
- rapid economic growth in developing economies
- better diversification as they may be independent of major economic powers
24
Q
What are the drawback of investment in emerging markets
7
A
- higher volatility/riskiness
- low marketability
- political instability
- regulation of the stock market may be poor
- restrictions on foreign investment
- communication problems
- availability and quality of information
