14.) Investing in the Fund and Distributions from the Fund

Question 1

Define distribution period

Answer 1

Period over which dividend income is accumulated between XD dates

Question 2

Define XD date

Answer 2

Date dividend is declared.

All shareholders on the register at XD date are entitled to receive the dividend.

Dividend is taken out of the fund on XD date

An investor that buys a share on XD date will not receive dividend

Question 3

Define dividend reinforcement

Answer 3

Shareholders use dividend to purchase more units in the fund

Dividend is usually reinvested at the offer price on pay date

Question 4

Define distribution units

Answer 4

Income distributed to shareholders in the form of a dividend

Question 5

Define accumulation units

Answer 5

Dividend is declared and automatically reinvested. The price of units will increase by the amount of the dividend declared

Dividend is deemed to have been paid

Investor is liable to pay tax on the distribution amount

Question 6

Define equalisation

Answer 6

Time apportioned distribution calculation

Calculated in order to make UK tax payments fair

Calculated to even out the effect of creation/liquidations

Calculations at each valuation point using the same method as that for calculating the distribution

Question 7

Define what the rules state to be the maximum number of distributions a fund can make during a year

Answer 7

There are NO rules dictating the maximum number of distributions a fund can make during a year

Question 8

Define where one could find details on the frequency of distributions that a fund makes

Answer 8

In the prospectus

Question 9

Define the difference between income and equity funds in terms of distributions

Answer 9

An Income fund usually pays quarterly distributions

An equity fund usually pays one small distribution per year

Note that, although most funds pay out net income, i.e. income received after deduction of expenses, there are some funds which pay out gross income, with expenses being paid from capital

Question 10

Define what the frequency and amount of distribution a funds makes depend on

Answer 10

The income earned by the fund

Question 11

Define where the method for calculating a fund’s income will be shown

Answer 11

In the prospectus of the fund

Question 12

Define the formula for calculating the distribution amount that a fund will pay out

Answer 12

1. ) Income is received and accrued to XD date
2. ) Less fees and expenses paid and accrued to XD date
3. ) Add income brought forward (undistributed income from previous distribution)
4. ) Less income carried forward to next distribution period
5. ) Distributable income is divided by shares in issue on XD date to provide rate per share

Question 13

Define distribution date/pay date

Answer 13

The date the distribution is paid to investors

Question 14

Define the documents that will be sent to unit holders/shareholders (I.e. investors) in a fund when a distribution is paid out to them

Answer 14

1. ) Payment acknowledgment or cheque
2. ) Tax voucher, if applicable
3. ) Dividend voucher, containing the following information:

Investor details

Number of shares

Dividend rate - The calculation of the dividend rate, whether paid out or reinvested

How much of the income amount represents equalisation, if applicable

Question 15

Compare how the distribution of a fund in Jersey is paid out to residents and non-residents, respectively

Answer 15

Distribution is paid gross to NON-residents

Jersey residents will receive the distribution net of 20% tax

Question 16

Define whose responsibility it is to declare the distribution of a fund, and pay tax on it if applicable

Answer 16

It is the responsibility of the investor

Question 17

Define which type of person the EU Savings Directive applies to, and its effects

Answer 17

The EU Savings Directive applies to EU residents who receive distributions from certain Jersey funds, and where applicable, the manager will deduct withholding tax from the distributions and pay this to the relevant authorities.

The investor will receive the distribution net of the withholding tax

Question 18

Define distributor status, and describe its objective

Answer 18

Introduced by UK authorities to prevent the tax be befit enjoyed by UK investors (resident in the UK for tax purposes) who had invested in offshore roll up funds.

The objective of these funds was to ‘roll up’ any income into the price of the share, therefore on disposal, the income was converted to capital gain

Question 19

Define the result of distributor status

Answer 19

The result of Distributor Status was that investors who are resident in the UK for tax purposes and hold investments in offshore funds:

1. ) Where the offshore fund obtains distributor status, all gains on disposal are subject to CGT rather than income tax
2. ) Where the offshore fund doesn’t obtain distributor status, all gains on disposal are subject to income tax

Question 20

Define and describe yields

Answer 20

The yield is the return on an investment, usually expressed as a % of the offer market value

Question 21

Define the factors that will usually affect the yield of a fund

Answer 21

Expenses of the fund - income is net of expenses

Income produced by the portfolio

Anything that will increase/decrease the offer price of the fund,e.g…

…Initial charge, dealing charges, brokerage, etc

Question 22

Define the formula for calculating the yield

Answer 22

Annual dividend or income divided by the offer market value

Question 23

Define the two types of yield

Answer 23

Historic yields

Current yields

Note that the difference between them is the figure used for the annual income or distribution payment

Question 24

Define historic yields, and how they are calculated

Answer 24

Historic yields are calculated using the previous annual distribution made by the fund.

The yield is calculated by dividing the distribution (10p) by the offer price

Note that this method is mainly used for EQUITY funds, as it would be difficult to use the current yield calculation

Question 25

Define current yields, and how they are calculated

Answer 25

Estimated annual income - estimated annual expenses Divided by the current shares in issue to calculate the income rate per share.
V
Divide the rate by the offer price to calculate the yield

Therefore, the current yield is calculated issuing a distribution rate calculated on the estimated annual income that would be produced by the current portfolio of the fund

Note that this method is mainly used with INCOME funds, where the portfolio comprises fixed interest stocks, as it gives a truer estimate of the return on the investment

Question 26

Define where the process for buying snd selling shares/units in a fund is explained, in terms of documentation

Answer 26

The process for buying and selling shares/units in a fund is explained in the prospectus and key features document of the fund

Question 27

Define who creates the Units in a fund, a question that might be asked by a potential investor into the fund

Answer 27

Units are created by the trustee/custodian, on the instruction of the manager, who must pay the trustee/custodian money for said units

Question 28

Define when the Units in a fund are issued, a question that might be asked by a potential investor into the fund

Answer 28

Once created, the manager issues the units to any individual who applies to buy units at a price fixed by the manager.

This price is referred to as the buying price or offer price, which must be within the limits set down by the regulations

Note that managers often hold a ‘box’ of units and act as a market maker, buying units from holders who want to sell, and selling them to investors who wish to purchase units

Question 29

Define when are Units in a fund redeemed, a question that might be asked by a potential investor into the fund

Answer 29

If a unit holder wishes to redeem their holding, they normally deal with the manager of the fund directly, or via an intermediary.

The manager will redeem the units, again at a price fixed by the manager.

This price is known as the selling price, and must be within the limits set down by the regulations

Question 30

Define when Units in a fund cease to exist, a question that might be asked by a potential investor into the fund

Answer 30

Managers give instructions to the trustee/custodian to cancel units.

Usually this happens when there are more people selling shares than buying them, and the manager isn’t able to hold the units in the ‘box’

(Managers often hold a ‘box’ of units and act as a market maker, buying units from holders who want to sell, and selling them to investors who wish to purchase units)

Question 31

Define how investors in a fund can buy/sell units, a question that might be asked by a potential investor into the fund

Answer 31

Shares can be bought and sold in the following ways:

(Direct) Deal with managers direct, via telephone, letter, email and fax

(Intermediate) Use an intermediary to place the deal for them

(Lengthy wait/Paper instruction) Complete an application form and send it by post, together with payment, to the managers - purchases only

Question 32

Define initial offer period, in terms of funds

Answer 32

When a fund is launched for the first time, the managers fix the price at which it is offered to the public for the period of launch, or Initial Offer Period.

The Initial Offer Period may be up to 21 days

The period of offer and the offer price are stated in the Scheme Particulars and Offer Document

The offer price will include the initial charge, if any.

The managers may choose to create units on a daily basis, or create all the units at the end of the launch period

The launch of a new fund usually receives significant publicity, so the managers may offer a discount during this time. The discount will be met by the initial charge

Question 33

Define where the period of offer and the offer price of a fund would be stated, in terms of documentation

Answer 33

The period of offer and the offer price are stated in the Scheme Particulars and Offer Document

Question 34

Define the factors that all procedures for investing in funds should have adequate controls to cover

Answer 34

New investors making their first investment in the fund

Existing investors buying and selling shares

Dealing with agents and intermediaries

Third party transactions

Management of risk - investor and company

Classification of investor

Settlement of transactions - cash, cheques, bank transfers, etc

Investment limits for investors and intermediarieso

Question 35

Define and describe the process for dealing in a retail fund

Answer 35

The process is as follows:

1. ) The valuation is prepared and the bid and offer price calculated
2. ) Once the valuation has been checked, the share prices are passed to the relevant department
3. ) Deals are processed in accordance with procedures

Question 36

Define the alternate name for dealing in a retail fund is usually described as

Answer 36

Dealing in the fund is usually described as ‘the taking of an order for the sale or repurchase of units in the fund’

Question 37

Define the information on a fund that a dealer requires before processing a deal on a retail fund

Answer 37

The price of the fund

The price basis

The dealing basis - historic or forward

Dealing times and cut-off points

Manager’s ‘box’ for sale

Clear instructions from the client

Question 38

Define the information that a dealer will require from an investor in a retail fund in order for the relevant deal to be placed on the system

Answer 38

The fund name

Whether the deal is a purchase, sale or switch

The number of shares or monetary value being dealt

The name and address of the client and account number for existing client

The name of the broker or intermediary, if any

The applicable discount or commission

A contact telephone or fax number for deal price/confirmation if applicable

Any other relevant information, e.g. marketing reference, special deal code, etc

Settlement instructions for a sale

Note that where instructions are taken over the phone, or the relevant application form hasn’t been received yet, the deal will be written on z dealing sheet/form, which will contain sufficient information to allow the deal to be processed

Also note that each deal will usually be given a reference number, which will enable staff to quickly locate the deal in the event of a subsequent enquirer. For most companies, it is standard practice for all dealing conversations to be recorded, in case of dispute

Question 39

Define the acronym KYC

Answer 39

Know Your Customer

Question 40

Define Know Your Customer (KYC)

Answer 40

Know your customer (KYC) is the process of a business verifying the identity of its clients

It is also a standard form in the investment industry that ensures investment advisors know detailed information about their clients’ risk tolerance , investment knowledge and financial position.

An important part of the investment process

All organisations will have strict controls and procedures in place for this process

KYC won’t stop when the customer first invests, it is an ongoing process, and will continue throughout the relationship with the investor

Question 41

Define the other functions of dealing in funds

Answer 41

Ensure that all deals conform to prescribed conditions, e.g. minimum shareholding

Check that all deals result in contract note, and check the contract notes

Reconcile deals and assist in the co-ordination of the creation and cancellation of units

To immediately notify the manager of large or unusual deals

Question 42

Define the managers box

Answer 42

Most managers operate a box through which they buy and sell units in the fund

Each dealing day, the manager will collect all the shares that are being purchased and sold in the box

Where possible, the maher will meet orders for sales from the shares in the box

Once dealing is compete, the manager will ask the fund to either create or redeem shares

The manager will then settle the transaction with the fund

Question 43

Define compulsory redemption

Answer 43

Relates to a protective clause in the prospectus/offer document of a new fund being launched, to the effect that after a set period of time, e.g. 12 months, if the fund hasn’t reached a minimum size, the manager may redeem all the outstanding shares/units.

This clause may also include that if the fund remains below a minimum size for a set period, e.g. 6 consecutive months, the manager may redeem all the outstanding shares/units

Question 44

Define switching

Answer 44

Where shareholders exchange units in one sub-fund for units in another sub-fund of the same umbrella fund

Often, managers will offer a special price for this, e.g. a switch price won’t include initial charge

Question 45

Define discounts and commission

Answer 45

These are incentives for investors and IFAs to place business with the fund manager, and the manager pays them

Discounts are offered to investors. They’re often used when the manager is promoting a particular fund.

Discounts are shown as a deduction from the offer price on the contract note

Commission is paid to IFAs and other introducers of business. They aren’t always shown on on the contract, and are paid direct to the intermediary. Investors should be made aware of any commission paid to the third party

Question 46

Define the role of currency when investing in a fund

Answer 46

Most managers will offer the investor the ability to invest in a currency other than the base currency of the fund

The manager will usually offer to perform the currency exchange for the investor, if it is required

Question 47

Define the register of investors in a fund/share register

Answer 47

A register or record of the investors in a fund. It’s function is to record all the details of the investors, e.g. name, address, certificate details, settlement instructions, dividend requirements, and details of all transactions carried out

Question 48

Describe the register of investors in a fund/share register for joint holdings

Answer 48

For joint holdings, the holding is usually registered in the name of the first holder, with the other names recorded.

Where one of the holders dies, the other joint holders continue to be the holders.

The name of the deceased holder should be deleted from the register and the share certificate. It isn’t possible to act on the instructions of only one of the holders: all instructions must be signed by ALL the holders

Question 49

Define how changes to the register of investors in a fund/share register are carried out

Answer 49

Changes to the register, e.g. address, name, etc can only be carried out upon written instructions received from the investor, together with any relevant documents, e.g. marriage certificate for change of name. Procedures should be in place to cover this

Question 50

Define what is required in order to act as a registrar to a fund in Jersey

Answer 50

A functionary permit is required

Question 51

Define who the register of investors in a fund/share register is maintained by

Answer 51

The registrar

Question 52

Describe nominee holdings, in relation to registers of investors in a fund/share registers

Answer 52

Shares held in a nominee name offers complete confidentiality to investors, as the shares are registered in a nominee name

This can offer flexibility for joint holders - usually allows for just one of the holders to sign

Sometimes managers will offer this service at a reduced charge or no charge to investors, who invest in funds managed by the fund management company

Question 53

Define the factors that the procedures of maintaining the share register of a fund should contain controls to cover

Answer 53

Requests to update information currently held on the register should only be performed when instructions have been received in writing from the share holder

Once information had been updated, it should be checked by an independent source to ensure that the information has been input correctly

There should be restrictions on the number of people who have the ability to update the register

The system should maintain a full audit trail of all changes to the register

Where the fund is open-ended with a large number of investors, there should be segregation of duties so that the same person can’t both input transactions and update standing data

The share register should be reconciled to the number of shares held in the fund records to ensure that there are no errors or possible mis-pricing of the fund

Where the system produces daily reports showing all the transactions that’ve been input, this should be reviewed to ensure that it is all correct. If no such report is produced, there should be a procedure in place to review the register once everything has been input, to ensure that it is all correct

Note that it’s important that there are strict procedures in place to control the updating of information held on the share register. The procedures should be sufficiently stringent to prevent the system being used for fraudulent purposes

Question 54

Define regular income plan

Answer 54

This is where an investor wants a regular income paid, I.e. a set amount of income.

The investor will state the amount of income required at each distribution, and if the distribution amount paid is insufficient, then units will be sold to make up the shortfall

The capital value of the holding will fall as more units are sold to make up income shortfalls

Question 55

Define monthly investment plan/savings plan

Answer 55

A service offered by the manager, and is used by investors as a method of building up a holding in a fund, by purchasing in a cost-effective way

Investors make regular purchases of shares by investing a set amount of money each month. This helps to smooth out the speculative element of stock markets

The investment is made at a set date of each month at the offer price, and can be cancelled at any time

There is usually a minimum monthly investment amount, which will vary according to the fund

Question 56

Define the acronym PCA

Answer 56

Pound Cost Averaging

Question 57

Define the benefits of using a monthly investment plan/savings plan as a type of investment strategy

Answer 57

With this kind of investment strategy, an investor can benefit from Pound Cost Averaging (PCA), meaning that an investor can purchase shares/units over a long-term at a cost which is less than the average cost of the period in question

Where fund managers offer savings schemes, it may also be possible that the investor could benefit from reduced initial charges

Note that acquiring shares/units on a regular basis relieves the investor of having to make the decisions concerning the timing of the investment

Question 58

Define share exchange service

Answer 58

A service offered by the manager whereby shares are exchanged for payment, for purchase of units in a fund

The shares are either sold in the market or taken into the portfolio by the fund manager

The shares must be quoted on a recognised stock exchange

The shares are purchased by the manager at the current offer price

It is at the manager’s discretion whether the shares are taken