5 - Investment Products (14/80)

Question 1

Open-Ended Funds

Answer 1

Unit Trusts / OIECs

Price = NAV
Issues new shares when investors buy; sell back to fund
‘Dilution levy’ fee charged when entering/exiting (covers trading fees so NAV isn’t diluted)

Liquidity
Access large securities
Diversification
Spreads cost
Management expertise

Question 2

Closed-Ended Funds

Answer 2

Investment trusts

Shares sold on exchanges - no changes to float
Price = market value
Trades at premium/discount to NAV

Question 3

Open-Ended Investment Collectives / ICVC

Answer 3

Structured as a company
Run by an ‘authorised corporate director’
Pays dividends, not distributions

Question 4

Unit Trust

Answer 4

Structured as a trust

Pay distributions, not dividends

Question 5

ETF advantages

Answer 5

Prices quoted in real time
Shares traded throughout the day
Lower charges and no Stamp Duty

Question 6

Investment Trust

Answer 6

Traded on exchanges
Run by board of directors

More relaxed rules on security types and NAV concentration
Allowed to gear
Can be split into growth and income shares

Question 7

Investment Trust Shares

Answer 7

A shares -> ordinary w/ no voting rights
Zero dividend preference -> no income
Stepped preference -> income grows at set rate
Income and residual capital -> highly geared
Packaged units -> packages of capital, income and zero shares
C shares -> helps raise capital
S shares -> launches new trust with similar strategy
Convertibles

Question 8

REIT advantages and rules

Answer 8

Exempt from corporation tax and CGT
>90% of rent must be paid out
<40% NAV in any one property
0.5% SD instead of SDLT

Question 9

Collectives Taxation

Answer 9

CGT - Open, Closed, REIT exempt

Income

• Open: dividend vs savings depending on FI %
• Closed: dividend rates
• REIT: dividend or property income

Question 10

Types of Offshore Fund

Answer 10

Reporting - report to HMRC, taxed at CGT rates
-> distribute 85% of investment income

Non-reporting - don’t report, taxed at income rates, can roll up CG and income
-> Useful for tax sheltering

Question 11

Fund Pricing

Answer 11

Open-ended

• Single = One simple NAV
• Double = Manager bid and offer prices
• Forward = based on price paid by orders (blind)
• Historic = based on last valuation

Closed-ended
- Premium or discount to NAV

Question 12

ETFs - Physical vs Synthetic

Answer 12

Physical = own underlying assets

Synthetic = replicated through derivatives
-> Offer up securities as collateral, in exchange for mimicking an index

Question 13

Synthetic ETF Risks

Answer 13

Counterparty = lender/etc. fails to meet obligations
Collateral = collateral offered defaults etc.

Question 14

Tax-Efficient Savings

Answer 14

ISA = £20,000 allowance, >18 (S&S), >16 (Cash)

LISA = £4,000 allowance, 25% bonus, 18-50

HtB ISA = £1,000 max, £200/m, max £3,000 bonus -> can contribute until 2029

Innovative Finance ISA = £20,000 limit, P2P lending

CTF/JISA = for children; CTF discontinued in 2011; £9,000 limit

Investment bonds

NS&I

Question 15

Onshore Life Assurance

Answer 15

SP/RP bonds = encashment value depending on investments

Unit-linked bonds = premiums buy units in a life co. fund; no sum assured (life cover built in to product)

With-profits bonds = premiums invested by life co. ; receive sum assured and share of profits

Distribution bonds = separate income and capital

Question 16

Onshore Bond Tax

Answer 16

No CGT / income tax payable (unless higher or additional taxpayer)
Can withdraw 5% of premiums paid per year

Question 17

Offshore Life Assurance (Bonds)

Answer 17

5% annual redemption; gifted without tax; don’t pay CGT on crystallisation

Income and growth accumulate within product free of income tax and CGT

Question 18

Portfolio Bonds

Answer 18

Wealthy investors can create their own portfolios with life companies

Question 19

Capital redemption bonds

Answer 19

No life assurance element; only capital is returned

Question 20

Types of Private Equity

Answer 20

Bootstrap funding = self-funding
Venture capital = early stage, high growth
LBOs = debt alongside capital
Mezzanine = subordinated debt, preference shares; junior in capital structure
Growth capital = mature companies tapping into growth

Secondaries = selling of PE shares to other investors
Equity co-investment = invest in funds outside of the main push

Question 21

Types of PE Partner

Answer 21

General partner = managers of PE funds

Limited partner = investors in PE funds

Question 22

Enterprise Investment Scheme (EIS)

Answer 22

30% income tax relief, up to £1,000,000 investment (£300k relief)
Shares must be held for >3 years (free from CGT)

Firm value must be under £15m
Must be independent and private
Max £12m EIS per firm; £20m for ‘knowledge intensive’

Question 23

Seed Enterprise Investment Scheme (SEIS)

Answer 23

50% income tax relief, up to £100,000 (£50k tax relief)
50% exempt from CGT
30% max share in target

<2 years old, <25 employees,

Question 24

Venture Capital Trusts (VCT)

Answer 24

Exchange-traded funds that hold VC investments

30% income tax relief; max £200k/year (£60k relief) (only for new issues)
No CGT
No tax on dividends paid out
Must hold for >5 years

Question 25

Distribution-Influenced Funds

Answer 25

Basically adviser-created model portfolios Need to have no commission and fees must be similar to market Must be compared against 3rd parties when making client recommendations

Question 26

Futures

Answer 26

Contract to buy something at a set price on a set date ``` Long = buyer, Short = seller Open = initial trade, Close = trade completed ```

Question 27

Options

Answer 27

Gives the right, but not the obligation, to buy/sell an underlying asset Call = but, Put = sell Holder = buyer, Writer = seller Premium = price paid Strike price = specified price for underlying At-the-money -> strike price = underlying price In-the-money and out-of-the-money

Question 28

Option Styles

Answer 28

``` American = exercised at any time European = exercised at maturity Asian = takes average of underlying value Bermudan = exercised at pre-determined dates ```

Question 29

Call Option

Answer 29

Buyer - Max profit = unlimited - Max loss = premium paid Seller - Max profit = premium - Max loss = unlimited Share price can increase infinitely

Question 30

Put Option

Answer 30

Buyer - Max profit = strike price - premium - Max loss = premium paid Seller - Max profit = premium - Max loss = strike price - premium Share price can only decrease to zero

Question 31

Option Premium

Answer 31

Intrinsic Value + Time Value Intrinsic Value = difference between strike price and underlying price Time Value = gets lower closer to maturity Also affected by: - Underlying price - Strike price - Volatility - Yield on underlying (higher yield = put > call as it pays off to hold the asset) - Interest rates (higher rates = call > put as it pays off to offload the asset)

Question 32

Warrants

Answer 32

Issued by companies about their stock Right to buy X amount of shares for a prest price Covered warrants = not written by that company but covered with warrants or shares

Question 33

CFDs

Answer 33

Derivatives settled in cash on the settlement date | Leverage limited to 30x

Question 34

Hedge Funds

Answer 34

High freedom to trade and gear; lock-in of 1-3 years; >£50,000 min. Illiquid; opaque; heavily geared

Question 35

Absolute Return Funds

Answer 35

Target specific returns in specific timeframes Not linked to any benchmark - state goals as 'benchmark + X%' Don't need to publish results Self-selection bias = poor funds don't report results Backfill bias = poor funds will only report good times Survivorship bias

Question 36

Structured Products

Answer 36

Structured deposits = linked to cash deposit, returns linked to an index Structured investments = packaged derivatives etc. - Principal protected - Capital at risk Counterparty risk = body providing derivatives etc. could go bust

Question 37

Types of Structured Investment Products

Answer 37

Principal-Protected = 5-7 years maturity, return linked to an index; guaranteed capital return on maturity Return-Enhanced = 1-3 years maturity, full downside exposure, 2-3x upside Income-Based = pay coupons Strategic Access = complex or hidden index Dual Index = linked to 2 indices Constant Proportion Portfolio Insurance = exposure to upside but protect downside Soft Protection = guarantee capital unless returns fall below a 'barrier' - American barrier = daily, European barrier = at maturity

Question 38

Pension Products

Answer 38

Occupation Pensions = DB/DC; paid into by employee and employer Personal Pensions = SIPP, GPP, retirement annuities Stakeholder = low cost, low minimums, simple Small Self-Administered Scheme = run for a company by directors - > Loans can be made against 50% of scheme assets - > Becomes an 'investment-regulated pension scheme' if <50 members and one of the members runs the investments

Question 39

Annuity Products

Answer 39

Lifetime = can be extended 5-10 years beyond death Impaired Life = ill people/smokers etc. Enhanced = long-term health conditions Deferred = pension bought by insurer