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COA: Investment and Fund Administration > 13.) Operation of the Fund > Flashcards

13.) Operation of the Fund Flashcards

1
Q

Define what funds are made up of

A

Assets and Liabilities

Note that all foreign assets and liabilities will be converted to the reporting currency of the fund using the latest available exchange rate.

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2
Q

Describe assets, one of the 2 features that makes up all funds

A

Investments are usually valued at market value and are the main asset of the fund. The method and timing of the valuation will depend on the type of asset, e.g. price for quoted stocks will be obtained from the relevant stock market using Reuters or other price providers, property will be valued using a professional valuation provider, unquoted investments will often be valued by the investment manager using the latest available accounts and other information available, etc

Cash will comprise of all the cash assets of the fund, which may be held in a number of currencies

Accrued income is income due to be received by the fund and would include investment income and bank interest

Monies due from managers would be funds due from the manager in settlement of outstanding subscriptions in the fund

Monies due from brokers or investments are proceeds due from the sale of the investments

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3
Q

Define what must first be calculated in order to calculate the price per unit/share of a fund

A

The NAV (Net Asset Value) of the fund

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4
Q

Describe liabilities, one of the 2 features that makes up all funds

A

Accrued expenses are expenses due to be paid by the fund but payment is yet to be made, e.g. management fees and custodian fees

Monies due to managers are funds due to the manager in respect of settlement on outstanding redemptions in the fund

Monies due to brokers are payments due to brokers for purchase of investments that have yet to settle

Distributions payable to shareholders are the payment of the dividend to the shareholders by the fund

Nominal shares and Founders shares are shares held by the Managers that if redeemed, the fund would have to pay the managers

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5
Q

Define and describe the process by which the dealing price of the shares/units of a fund are calculated

A
  1. ) Calculate the NAV of the fund, i.e. nets of total assets - total liabilities
  2. ) Establish the shares in issue
  3. ) Divide the NAV by the shares in issue to establish ‘NAV per share’
  4. ) Apply any pricing adjustments, e.g.

Initial charge is added to creation price

Exit charge is deducted from bid price

Roundings

  1. ) Shares are offered to the public at the offer price
  2. ) Shares are purchased from the public at the bid price
  3. ) The manager buys shares from the fund at the creation price and sells shares back to the fund at the cancellation price. This is always the price before any price adjustments or roundings, I.e. NAV per share
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6
Q

Define where the pricing policy of a fund must be disclosed

A

In the fund’s prospectus

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7
Q

Define and briefly describe the various methods of pricing policy for funds

A

A fund manager has a choice regarding the pricing policy of the fund. Most funds operate forward pricing, but there are some that operate under historic pricing.

1.) Forward pricing

Investors deal at NEXT valuation price

Investors deal at UNKNOWN price

2.) Historic pricing

Investors deal at LAST valuation price

Investors deal at KNOWN price

3.) Dual pricing

Investments priced at bid and offer prices

DIFFERENT bid and offer NAV

4.) Single pricing

Investments usually value at mid price

SAME bid and sale NAV

Buying/selling charges added to NAV to calculate bid and offer pricesh

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8
Q

Define and briefly describe Forward Pricing, one of the various methods of pricing policy for funds

A

Investors deal at NEXT valuation price

Investors deal at UNKNOWN price

Note that most funds operate forward pricing

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9
Q

Define and briefly describe Historic Pricing, one of the various methods of pricing policy for funds

A

Investors deal at LAST valuation price

Investors deal at KNOWN price

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10
Q

Define and briefly describe Dual Pricing, one of the various methods of pricing policy for funds

A

Investments priced at bid and offer prices

DIFFERENT bid and offer NAV

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11
Q

Define and briefly describe Single Pricing, one of the various methods of pricing policy for funds

A

Investments usually value at mid price

SAME bid and sale NAV

Buying/selling charges added to NAV to calculate bid and offer pricesh

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12
Q

Define the pricing adjustments that fund managers will make to the NAV of a fund in order to obtain the price at which they will buy and sell shares to the public

A

Initial charge

Exit charge

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13
Q

Define the features of the initial charge, on of the pricing adjustments that fund managers will make to the NAV of a fund in order to obtain the price at which they will buy and sell shares to the public

A

Added to NAV offer price

Can be used by managers to pay discounts to investors and IFAs (Independent Financial Advisers)

Paid by managers

Rate varies according to fund managers and fund types

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14
Q

Define the features of the exit charge, one of the pricing adjustments that fund managers will make to the NAV of a fund in order to obtain the price at which they will buy and sell shares to the public

A

Deducted from NAV bid price

Paid to managers

Rate varies according to fund managers and fund types

Acts as incentive to encourage investors to keep units

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15
Q

Define the similarities and differences between the initial charge and exit charge, the two pricing adjustments that fund managers will make to the NAV of a fund in order to obtain the price at which they will buy and sell shares to the public

A

Initial - ADDED TO NAV offer price

Exit - DEDUCTED FROM NAV bid price

Initial - Can be used by managers to pay discounts to investors and IFAs (Independent Financial Advisers)

Exit - Acts as incentive to encourage investors to keep units

Both - Paid by managers

Both - Rate varies according to fund managers and fund types

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16
Q

Define founders shares

A

Issued to the founders of a firm, these shares (stock) normally do not receive any return until dividend payable to common stock holders (ordinary share holders) is paid out. However, these shares are entitled to all of the remaining (after tax) profits, no matter how much.

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17
Q

Define the acronym IFA

A

Independent Financial Advisers (IFAs)

IFAs are professionals who offer independent advice on financial matters to their clients and recommend suitable financial products from the whole of the market.

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18
Q

Define the components of the Unit Cost Sheet of a fund

A

Market value of investments

Mid-market

Cash

Dividends receivable

Sundry debtors

Sundry creditors

Nominal shares

Dealing charge

Initial charge

Shares in issue

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19
Q

Define bid offer spread

A

(In the unit cost sheet of a fund) The difference between the bid and offer price, usually expressed as a % of the offer price

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20
Q

Define who is responsible for preparing the valuation of a fund

A

The manager of the fund

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21
Q

Defined the formula for calculating the NAV/Net Asset Value of a fund

A

NAV = total assets - total liabilities

Note that the method for calculating the NAV, and the frequency of the calculation, will be detailed in the key fund documentation and the prospectus.

Whilst the frequency and the method for valuing the assets will differ between funds, the principle of the calculation won’t change.

21
Q

Describe the actions that the manager of a fund will take in order to ensure that the valuation of said fund is correct

A

In order to minimise the risk of incorrect valuations, managers ensure that procedures are put in place to check the accuracy of the valuations.

The procedures will vary according to the fund manager.

Many fund managers have a checklist that they use in order to check the valuation.

Each part of the valuation must be checked with the most detailed checks being performed on the investment portfolio, often using exception reports, which identify non-moving stocks, or stocks that have moved over a certain pre-set % rate, that carries out the checking.

23
Q

Define the consequences of a manager over- or under-valuing a fund

A

The accuracy of a valuation is critical. If the fund is over or under valued, the consequences for the manager can be damaging, both to their own reputation and financially.

If the fund is OVER-valued - shareholders will be overpaid when they redeem units.

If the fund is UNDER-valued - shareholders buying shares will be undercharged.

In both cases, the manager must repay the fund for the loss.

24
Q

Define the areas of a fund in which the main (valuation) checks would be performed

A

Investment portfolio

Cash movements

Debtors

Creditors

Shares in issue

25
Q

Define the checks that would be carried out on the investment portfolio of a fund, one of the areas of a fund in which the main (valuation) checks would be carried out

A

Each aspect of the portfolio would be reviewed, including:

Purchases and sales of investments

Market movements of the portfolio

Currency of the stocks, including foreign exchange rates

Stock name and nominal (value?)

26
Q

Define the check that would be carried out on the cash movements within a fund, one of the areas of a fund in which the main (valuation) checks would be carried out

A

The balances would be reviewed and checked to ensure that all payments and receipts since the last valuation have been processed

27
Q

Define the checks that would be carried out on the debtors of a fund, one of the areas of a fund in which the main (valuation) checks would be carried out

A

Accruals movements since previous valuation

Dividends receivable

Accrued interest in fixed interest stocks

Bank interest

Receipts

28
Q

Define the checks that would be carried out on the creditors of a fund, one of the areas of a fund in which the main (valuation) checks would be carried out

A

Accruals movement since previous valuation (as is also the case when checking the debtors of a fund)

Payments

29
Q

Define the checks that would be carried out on the shares in issue of a fund, one of the areas of a fund in which the main (valuation) checks would be carried out

A

Foreign exchange rates

Dividend payable - fund XD

Overall price check from previous valuation:
Compare price of:

  1. ) Relevant index
  2. ) Previous valuation price
  3. ) Market

Note that it is important that the price is calculated using the correct shares in issue figure. The shares should be checked to ensure that all the creations and redemptions have been properly processed.

30
Q

Define the possible reasons behind movements in the value of a fund, an important factor when performing valuation checks on a fund

A

Fund going XD - price will fall by the amount of the dividend

Movement in the market price of the investments

Movement in the fording exchange rates

31
Q

Define the transactions that WON’T usually cause a major movement in the price of the shares/units of a fund, an important factor when performing valuation checks on a fund

A

Purchase of investments - cost price should be close to market value

Sale of investments - cash or brokers accounts will increase accordingly

Payment of expenses, receipt of income

Stock going XD - debtor will be set up for the dividend

32
Q

Define the importance of taking into account the fees and expenses of a fund when performing valuation checks on it

A

Every fund is liable to pay all expenses that relate to the day to day running of the fund, e.g. audit fees, bank charges, management fees, custodian fees, etc. Details of the fees and expenses paid by a fund will be found in the fund’s prospectus

Fees and expenses outstanding at the valuation point are accrued and shown on the unit cost sheet as a creditor

It is necessary to accrue all fees and expenses in order to ascertain the correct NAV per share. If they weren’t accrued, the NAV would fall when expenses were paid, making it inequitable for shareholders buying or selling shares on that day

33
Q

Define where details of the fees and expenses paid by a fund will be found

A

Details of the fees and expenses paid by a fund will be found in the fund’s prospectus

34
Q

Define the importance of taking into account the fixed fees of a fund when performing valuation checks on it

A

Certain expenses are a fixed amount, meaning that the daily accrual will be the same unless the expense amount changes.

These fees, e.g. Audit fee, don’t change when the fund increases/decreases in size

35
Q

Define the importance of taking into account the variable fees of a fund when performing valuation checks on it

A

Certain fees are charged as a % of the NAV and the daily accrual will charge accordingly.

Unlike the fixed fee, the accrual will increase as the NAV increases, and decrease when the NAV decreases

36
Q

Define the acronym TERS

A

Total Expense Ratios

37
Q

Define and describe the use of Total Expense Ratios (TERS)

A

The Total Expense Ratio is used to compare the performance of funds as it identifies the operating expenses (not including management and custodian fees) as a % of the NAV.

Whilst many investors look at the management fee paid by the fund, they don’t always look at the other costs.

The figures placed in the annual accounts are used to calculate the TERs.

38
Q

Define what the manager of a fund is not allowed to deal in, as per the investment restrictions of the fund

A

Stocks

39
Q

Define where the rules regarding the investment powers of a fund are set out

A

In the trust deed/memorandum and articles of association and prospectus

40
Q

Define how the restrictions on a fund are determined

A

By the investment objective of the fund and by local legislation

41
Q

Define why there are investment/borrowing restrictions on funds

A

For the protection of shareholders, and to ensure that the fund is liquid and sufficiently well diversified

42
Q

Define what the range of limits on the rules of a fund are based on

A

A % of the NAV of the fund

43
Q

Define the details of the rules of a fund

A

Different types of investments in which the fund is allowed to invest

Eligibility of markets in which the investments may be purchased

44
Q

Define who the manager of a fund will consult with, when determining the eligibility of markets

A

The trustee/custodian

45
Q

Define the characteristics that a market must have in order for the relevant fund to be eligible

A

Well regulated

Operate regularly

Be recognised as a market

Be open to the public

46
Q

Define the difference in principal investment restrictions between Unclassified and Recognised funds

A

For an UNCLASSIFIED fund, the prospectus and fund documentation sets out investment restrictions, as opposed via the legislation

For a RECOGNISED fund, the investment restrictions are set out clearly

Note that legislation sets out the restrictions for each class of fund

47
Q

Define the (principal investment) restrictions that legislation sets out for each class of fund (Recognised and Unclassified)

A

A maximum of:

10% of fund to be held in unquoted securities

5% of fund in transferable securities issued by one issuer

10% of share capital of an investment itself

10% of the total units in issue of a single collective investment fund

5% of fund in units of CIF (Collective Investment Fund)

5% of fund in warrants

10% of fund in transferable securities NOT on recognised stock exchange

48
Q

Define the borrowing restrictions that legislation sets out for each class of fund (Recognised and Unclassified)

A

Maximum 25% of fund, for short term purpose of an UNCLASSIFIED fund

10% for a RECOGNISED fund, except a geared futures and options fund, which isn’t allowed to borrow

49
Q

Define efficient portfolio management, and briefly describe its rules

A

Efficient portfolio management sets out the way in which a manager may use derivatives.

This will be done in accordance with any investment restrictions set out in the prospectus

The rules are that:

All transactions must be economically appropriate, e.g…

  1. ) Will reduce risk of costs, which are sensible to reduce
  2. ) Generate additional capital or income, with certain benefit to the fund
  3. ) Achieve a switch in exposure without having to buy/sell investments with a cost/low risk benefit
50
Q

Define stock lending, and how it can be used by a fund

A

Shares owned by the fund are transferred to the borrowing institution in return for shares of the same kind and amount to be transferred back at a later date.

The borrower is also required to provide and transfer collateral to the fund to cover against risk that the transfer may not be completed

Funds can use stock lending to earn additional income for the fund, subject to certain conditions

COA: Investment and Fund Administration (15 decks)

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