5 -Investments Prods Flashcards
types of collective investment scheme
Unit trusts
- open ended (no restriction on size can adjust to meet demand), legally a trust
- 20% CT
OEIC/ICVC
- open ended, legally a company
- PAIF = type of OEIC with 60% property allocation
- 20% CT
ITC - investment trust company
- legally a company, trades on LSE, closed ended
- VCT = venture capital trust - 75% EIS investment, REIT - 75% physical property investmnet
adv and disadv of collectives
adv
most investors dont have time to allocate to investment management - funds are ready maid portfolios
economies of scale
diversified
admin handled by funs
dis adv
entry, annual, performance charges, custodian fees
risk
lack of control
star managers may move
Unit trusts/ OEICs
tax?
NAV?
20% CT on income
both bond and equity funds pay savings income/divi gross
no stamp duty for investor
possible CGT on sale (eq)
OEICs - daily NAVV calc for pricing of unit
+ dilution levy to cover dealing costs
unit trusts - bid offer pricing
single pricing funds (OEICS and some UTs) can take advantage of UCITS dirctvie to market in europe
European funds
SICAV - open ended fund that can gain UCITS compliancy similar to ICVC
FCP - open ended funds establed between investor and manager, neither trust nor sompany
more like an open partnership
UCITS directives
how can a CIS qualify?
CISs are regulated by the UCITS directive in the EU
to qualify CIS must
obtain passport from home regulator, be open ended, not invest in prohibited asset classes (property or commodity) + single pricing
UCITS III
product directive expands range of financial instruments permitted in UICTS funds, gearing restrictions (max 10% NAV)
UCITS IV
passporting rules, KIID, supervision
Money market funds
what?
objective?
types?
benchmark?
invest in short term cash or near cash assets (1 year maturity money market prods)
In Europe set up as UCITS schemes
cash, commercial paper, short term gilts, T-bills
objectives - preservation of capital, liquidity, sector concerns
types
constant NAV- income paid out or reinvested
accumulating NAV - income not distributed but added to value of shares
benchmark
- LIBID - london interbanj bid rate
- SONIA - sterling overnight interbank average - avg interbank unsecured overnight deposites min deal size 25mili (bofE)
- EONIA - euro overnigh avg - weighted avg of unsecured euro overigh deposits (ECB)
ITCs
company not a trust, closed ended, trades on secondary market
can leverage which unit trusts and ICVCS cannot
usually hit share volume limit at IPO
19% CT on income
not direct holdings
no CGT
divi paid gross, investor pays stamp duty and potential CGT’
prices dictated by supply and demand - can trade at prem or disocunt to NAV
gearing risk
2 types of ITC
packaged units?
conventional and split capital
conventional - run like normal company with indefinite life
2 classes of share: ordinary and preference
split cap
set up for specified period (5-10) years after which porfolio is liquidated
3 basic types of share
zero divi - 1st shareholder paid in liquidation, redemed at pre secified value
income - regular distributions, typically pre specificed redemption val, 2nd paid @ liquidation
capital - typically no income, last shareholder paid, receive any residual funds
can also get packaged units that represent a hydrbid of above
other share types
A shares - ordinary with no voting rights and highest right to divi
stepped preference - income grows at predetermined rate and predetermined mat value
income and resiudal cap shares - issued by ITC with high levels of borrowing - high risk
Packaged unit shares in split capital ITC
packaged units that represent a hybrid of (zero divi, income and capital) typical shares
A shares - ordinary with no voting rights and highest right to divi
stepped preference - income grows at predetermined rate and predetermined mat value
income and resiudal cap shares - issued by ITC with high levels of borrowing - high risk
REITS key differences to ITC
> 75% property allocation
more tax efficient - no CT when 90% of income is distributed
divi taxed as property income (20, 40, 45)
VCT - venture capital trusts
tax incentives in start ups and small companies
no tax on divi
30% income tax relief up to max investment of 200k
5 year holding to quali of income tax relief
no CGT
ETF
adv?
listed and traded on LSE, no stamp duty, low charges, real time pricing
tracker fund - follows performance of an index
adv
exposure to variety of markets
high liquidity
can be held in ISA
gearing + long/shorting allowed
dont trade at discount/prem - only creates units on being given underlying basket of index
physical vs synthetic ETF
physical - investors use cash to buy underlying
synthetic - use deriv contracts to gain expose (e.g. total return swaps)
counterparty and collateral risk
stock lending in phsyical ETFs can expose to these risks also
Offshore funds - reporting vs non reporting
reporting funds
- must report income to HMRC and investors
- prepares accounts using GAAP format
- gives HMRC info on request
investor taxed as if onsure fund
non reporting
- income and gains taxed as income not at CGT rates
no annual CGT exemption
losses not offset against grains
Offshore funds - reporting vs non reporting
reporting funds
- must report income to HMRC and investors
- prepares accounts using GAAP format
- gives HMRC info on request
investor taxed as if onsure fund
non reporting
- income and gains taxed as income not at CGT rates
no annual CGT exemption
losses not offset against grains
tax summary for funds
Income tax - 20% CIS, 19% ITC, VCT, not for REITS (so long as +90% income paid out)
no CGT
Stamp duty - yes on equity and SDLT for REIT
tax summary for investor
income - equity CIS (div), debt CIS (savings), ITC (div) REIT (non savings as if direct rental income), VCT = NO
CIS and ITC - no witholding tax, paid gross
REIT = witholding tax
CIS, ITC, REIT - CGT (not for VCT if held over 5 years)
no stamp duty for open CIS
What is a hedge fund
why is it risky
UCIS - unregulated collective investment scheme typically offshore
low correlation with markets due to unregulation and variety of strats available
cannot be marketed to retail clients (only wealthy, sophisticated RI)
managers invest in own fund
risk:
larger positions, less diversified, long/short strat
leveraged, aggressive
little supervision
high initial investment and lock in periods
high management fees and performance fees
no FOS or FSCS
Measuring hedge fund performance and benchmarking
types of bias?
Investment association (IA) review of ARFs (absolute return funds)
diff because diverse objectives and lack of transparency
no mandatory reporting standard - creates biases
self selection - only those who want to report will - typically not v top or v bottom
backfill bias - funds just joining dont have to report past performance
survivorship bias - failing funds drop out of bench
Measuring hedge fund performance and benchmarking
Investment association (IA) review of ARFs (absolute return funds)
different because diverse objectives and lack of transparency
no mandatory reporting standard - creates biases
self selection - only those who want to report will - typically not v top or v bottom
backfill bias - funds just joining dont have to report past performance
survivorship bias - failing funds drop out of bench
PE investments
what is PE?
4 types of investment
PE invest in companies not listed on a stock exchange - more hands on w/ active involvement
aim to turn company around and take to IPO
venture cap - start ups and new tech with no track record. equity cap and strategic help (dragons den vibes)
mezzanine cap - subordinated debt, high risk/return unsecured lending
leverage dbuy out - established plc to private firm, acquisition debt
distressed debt - distressed comapnies, equity or debt, vulture funds may lookto buy and asset strip
EIS
enterprise investment scheme - aimed at helping smal high risk tradinc ompanies
500 - 1 mili investment size
income tax relief
30% cost of ordinary shares up to 1mili - max relief = 300k
must hold for 3 years from issue
can caryr back relief to previous issues
no CGT provided EIS held for 3 years
can offset losses againstincome tax relief for tax year
startups can apply for EIS status to incentivize
EIS company requirements
unlisted (AIM and ISDX growth is allowed)
<250 employees
<£12mili raised in total or <£5mili from VCT in any year
<7 years old
knowledge intensive = <10 years, <500 employees, funding cap is £20mili
life company investment bonds
not a debt security - bond like ‘my word is my bond’
typically used as investment not as life policy
benefits paid on death orencashment
qualifying policies - HMRC satis that bond in valid assurance product so taxed as such - no more tax to pay (fund already paid 20%)
non qualifying policies - on chargeable event extra income tax for HRT,ART
5% rule
life company bonds aren’t qualifying investments - tax can be deferred til death or encashment on a withdrawal of up to 5%
