5 - Investment Products (14/80) Flashcards
Open-Ended Funds
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
Closed-Ended Funds
Investment trusts
Shares sold on exchanges - no changes to float
Price = market value
Trades at premium/discount to NAV
Open-Ended Investment Collectives / ICVC
Structured as a company
Run by an ‘authorised corporate director’
Pays dividends, not distributions
Unit Trust
Structured as a trust
Pay distributions, not dividends
ETF advantages
Prices quoted in real time
Shares traded throughout the day
Lower charges and no Stamp Duty
Investment Trust
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
Investment Trust Shares
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
REIT advantages and rules
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
Collectives Taxation
CGT - Open, Closed, REIT exempt
Income
- Open: dividend vs savings depending on FI %
- Closed: dividend rates
- REIT: dividend or property income
Types of Offshore Fund
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
Fund Pricing
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
ETFs - Physical vs Synthetic
Physical = own underlying assets
Synthetic = replicated through derivatives
-> Offer up securities as collateral, in exchange for mimicking an index
Synthetic ETF Risks
Counterparty = lender/etc. fails to meet obligations Collateral = collateral offered defaults etc.
Tax-Efficient Savings
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
Onshore Life Assurance
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
Onshore Bond Tax
No CGT / income tax payable (unless higher or additional taxpayer)
Can withdraw 5% of premiums paid per year
Offshore Life Assurance (Bonds)
5% annual redemption; gifted without tax; don’t pay CGT on crystallisation
Income and growth accumulate within product free of income tax and CGT
Portfolio Bonds
Wealthy investors can create their own portfolios with life companies
Capital redemption bonds
No life assurance element; only capital is returned
Types of Private Equity
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
Types of PE Partner
General partner = managers of PE funds
Limited partner = investors in PE funds
Enterprise Investment Scheme (EIS)
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’
Seed Enterprise Investment Scheme (SEIS)
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,
Venture Capital Trusts (VCT)
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
Distribution-Influenced Funds
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
Futures
Contract to buy something at a set price on a set date
Long = buyer, Short = seller Open = initial trade, Close = trade completed
Options
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
Option Styles
American = exercised at any time European = exercised at maturity Asian = takes average of underlying value Bermudan = exercised at pre-determined dates
Call Option
Buyer
- Max profit = unlimited
- Max loss = premium paid
Seller
- Max profit = premium
- Max loss = unlimited
Share price can increase infinitely
Put Option
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
Option Premium
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)
Warrants
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
CFDs
Derivatives settled in cash on the settlement date
Leverage limited to 30x
Hedge Funds
High freedom to trade and gear; lock-in of 1-3 years; >£50,000 min.
Illiquid; opaque; heavily geared
Absolute Return Funds
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
Structured Products
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
Types of Structured Investment Products
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
Pension Products
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
Annuity Products
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
