11.1 Other investment classes

Question 1

Classes

Answer 1

• CISs (open and closed-ended)
• Derivatives
• Overseas markets
• Emerging markets

Question 2

Regulation on CISs

Answer 2

• Categories of assets that can be held
• Whether unquoted assets can be held
• Maximum level of gearing
• Tax relief

Question 3

Advantages of CIS

Answer 3

• Specialist expertise
• Diversification
• Some costs of direct investment are avoided
• Holdings are divisible- part of a holding may be sold
• May be tax advantages
• May be marketability advantages
• Can be used to track return on specific index

Question 4

Disadvantages of CIS

Answer 4

• Loss of investment choice
• Management charges
• May be tax disadvantages

Question 5

Reasons for investing in overseas market

Answer 5

• Liability matching
• Diversification
• Higher expected returns

Question 6

Problems with overseas investment

Answer 6

1. A different market performance to home market and associated mismatching risk
2. Currency fluctuation risk
3. Expertise
4. Additional administration functions: custodian, dividend tracking and collection
5. Tax
6. Accounting practices
7. Less information
8. Language 9. Time delays
9. Poor market regulation
10. Risk of adverse political developments
11. Liquidity
12. Restrictions on ownership of certain shares

Question 7

Ways to gain exposure in overseas markets

Answer 7

1. Invest in multinational companies based in home market
2. CISs
3. Derivatives

Question 8

Merits of investing in multi-nationals

Answer 8

Advantages
 Easy to deal in familiar market
 Companies will have expertise and tend to conduct business in most profitable areas overseas incl areas where direct investment is difficult
Disadvantages
 Such a company’s earnings will be diluted by domestic earnings
 Investor has no choice in where company transacts

Question 9

Factors to consider before investing in emerging markets

Answer 9

• Current market valuation
• Possibility of high economic growth rate
• Currency stability and strength
• Level of marketability
• Degree of political stability
• Market regulation
• Restrictions on foreign investment
• Range of companies available
• Communication problems
• Availability and quality of information

Question 10

Attractions of investing in emerging markets

Answer 10

• Current market valuation
- Inefficient markets: buy cheaply
- Perceived to be risky: buy cheaply
• Rapid economic growth
• Better diversification

Question 11

Drawbacks from investing in emerging markets

Answer 11

• Volatility
• Marketability
• Political stability
• Regulation of the stock market
• Regulations on foreign investment
• Communication problems and availability + quality of information

Question 12

Reasons for anomalies in stock pricing

Answer 12

1. Fair prices are set by lots of buyers and sellers….
   …. If there aren’t a lot of market participants, mechanism for establishing correct prices may be inefficient.
2. Dealing costs may be high therefore price anomalies must be bigger than dealing costs to entice investors.
3. Investment analysts likely to have less sophisticated techniques and methods for spotting anomalies.
   … Investors are also likely to be less sophisticated
4. May be inferior quality of information

Question 13

Open-ended vs closed-ended CIS

Answer 13

• Marketability
• Gearing
• NAV
• Expected return
• Volatility
• Uncertainty
• Range of investments
• Tax

Question 14

Share price of closed-ended CIS may be at discount to NAV due to:

Answer 14

• Management charges (deducted from dividends)
• Marketability
• Concerns over quality of management
• Market sentiment/fashion