2.5 CIS Flashcards
what are some of the objectives of a CIS?
income, capital growth, combination
What are the pros and cons of CIS?
Pros:
- time
- expertise
- benefit from economies of scale
- diversification is easy with pooled assets
cons:
costs: initial charge + ongoing fund management costs + exit charge (for less liquid assets) + performance fees
- risk returns are not guaranteed
- lack of control
what are regulated vs unregulated CIS?
regulated:
- recognised: overseas funds (eg. UCITS - EU directives)
- authorised: Domestic funds - UK rules
unregulated: UCIS eg. hedge funds
what is a trustee
person who makes sure manager acts in interests of investors
What 3 restrictions do regulated CIS typically have?
- concentration: must be diversified
- controlling interests: max exposure to single company
- borrowing: cannot be highly geared
What happens when restriction on investment powers fall?
restrictions on marketing increases
Who can each type of fund market to?
UCITS: in the EEA
Domestic funds: Domestic only
Unregulated: professional clients and domestic only
What main barnches can CIS be divided into?
Unit trusts
OEIC: open-ended investment companies (aka. ICVC)
What is the difference between distribution and accumulation units?
Distribution: pays out income
Accumulation: reinvests income
What are the differences between unit trusts and OEICs?
Holdings: units vs shares
Legal structure; trust vs company
supervision: trustee vs depositary
managed by: fund manager vs authorised corporate director
price system: bid offer (dual) vs single price (+additional admin fee)
What is a dilution levy?
Additional admin fee for single priced funds
What are investment trusts?
- Company
- Closed ended
- issues shares
- supervised by independent auditors
- managed by fund managers
- have flexible investment rules
- can borrow
- bid-offer price system
- value dictated by market sentiment (traded on secondary market - LSE)
What are open ended funds?
- trades performed directly w management
- no secondary market (units/shares not transferrable)
- portfolio is valued once every business day ( the valuation point)
- price based on NAV per unit/share (not influenced by market as there is no market; fund manager makes sure demand = supply)
pricing can be single or two way
costs:
- initial charges
- ongoing management charges
- exit charges (typically for limited time)
What are closed-ended funds?
Investment trusts:
- company NOT a trust
- shares trade on secondary market
- both ordinary and pref. shares
- closed ended (fixed capital structure) fixed number of shares - supply cant change based on demand
- can use gearing
- prices dictated by demand for shares (not supply)
- an trade at premium or discount to NAV
Closed-ended vehicles can:
- Invest in unquoted private companies as well as quoted companies
- Provide venture capital to new companies or companies requiring new funds for expansion
- Borrow money to help them achieve their objectives
what is a split capital inv. trust?
- companies set up for a limited period (eg. 5 yrs) with aim to liquidate by end of that period and provide investors w cash
- shares come out in 3 main classes:
zero div. pref shares
- no income + redemption val
income shares
- income + redemption val
capital shares
- no income + whatever is left in portfolio
- highest risk, highest potential return
What are venture capital trusts?
closed-ended vehicles which invest in relatively new/start-up
companies.
VCTs are structured like investment trusts and traded on the
London Stock Exchange.
What is an ETF
- incorporated as an ICVC but tradable on secondary markets (hybrid fund):
open ended
- trades at NAV
HOWEVER:
trade on secondary markets
- real time pricing (mitigates transparency issue with open-ended funds)
typically tracker or index funds (eg. FTSE 100)
What do short shares do?
Provide inverse performance to index
What do leveraged shares do?
Provide accelerated performance compared to index
Who can participate in primary ETF market ?
Only authorised participants
How are shares usually bought/sold from manager of an ETF?
- In kind (with baskets of the underlying securities)
so wapping baskets of shares for units
What are ETCs?
Exchange traded commodities
- commodity (not equity) based
- can link shares to commodity indexes
- benefit is easier exposure to commodity investment
What is a structured product?
Combination of 2 or more individual financial instruments (typically a bond and a deriv) to create a v specific risk reward profile
- created to get risk reward profiles that dont exist w other traditional products:
eg.
- low risk capital growth
- high risk, higher income levels
What can structured products be tailored to provide?
- growth w low risk or high income
- run for a defined term eg. 18 month to 7 yrs (early redemption penalty)
- defined risk and return
What are the 2 main types of structured product?
- structured deposit (returns on deposit linked to performance of another asset ) - you will still get principal back because its a deposit
- guaranteed by FSCS
- structured investment
- may not get capital protection
- no FSCS protection
What are the 3 main types of structured investment?
- capital protected product: discount on ZCB funds purchase of option, option can be linked to any asset
- capital at risk product: leveraged position but sacrifices capital protection
- buffer zone product
What is an example of a capital protected product?
zero coupon bond combined w a long option position
What is capital at risk product also known as?
accelerated tracker
What are the features of a buffer zone product?
- offers participation in returns on asset
- negative returns protected up to a predetermined level (eg. 20%)
- full exposure to loss if predetermined level is breached
What are the pros and cons of structured products?
pros:
flexible risk return
- principle protected
- risk enhanced
reduced volatility
often based offshore (in tax neutral societies)
cons:
- credit risk on bond
- counterparty risk on deriv
- provider risk on product itself
- inflation risk
- often needs to be held till maturity
- charges can be high
- call risk (auto calls are in place preventing opportunity to rebound from loss/further capitalise on gain)
What is direct property investment and its pros/cons?
Investment in property itself
pros: diversification of assets and relatively low volatility
a real asset - inflation protection
cons:
- illiquid
- high transaction costs
- possible depreciating values
what is indirect property investment?
Through funds
What are 2 types of property funds?
- Real estate investment trusts
- Property Open ended funds
What are features of REITs?
- removes liquidity risk of holding direct property
- REITs do not pay corp tac in UK if distributing 90% of income (to shareholders)
cons:
- volatility; buying shares not the actual property
What are features of property open ended funds?
-NAV pricing more directly reflects price of underlying property in portfolio
Cons:
- many funds resort to redemption moratoria
What is redemption moratoria?
infrequent redemptions (because underlying asset is very illiquid)
