6 Flashcards
Collective investment schemes
Unit trust & OEOIC
FSCS protection for OEIC & unit trust
£85k
How are unit trusts protected?
By trustees and trust deed
How are OEIC protected?
By independent depository and company law
Which of OEIC and unit trusts are open ended?
Both
Net asset value
Total assets of shares equal total assets held
Which of OEIC and trust funds must follow net asset value?
Both
Can OEIC and init trust shares be traded on the stock market or death?
Death only
Investment association of an OEIC and unit trust
Separates them into sections
Types of index tracking funds:
- Full relocation
- Stratified sampling
- Optimisation/synthetic
F - Fund owns shares in proportion to index
S - sample of funds held but not replicating index
O - buys and seeks stock within index using a computerised model
Efficient market hypothesis
All information is reflected in the market and their prices so the people who would support this would use index trackers only
Negative screening
Positive screening
Neutral approach
Neg. - avoid unethical practices
Pos. - actively seek out ethical invest.
Neut. - choosing socially responsible firms
What must a firm by to market in the UK?
Authorised by the FCA
Types of authorised funds:
Undertaking for financial investments (UCITS) scheme - once authorised can be marketed in the EU
Non-UCITS retail scheme - cannot be marketed in the EU
Qualified investors scheme - cannot be marketed other than to professional investors
What main thing must a firm be to be classed as a UCITS?
Diversified
5 rules of diversification for UCITS
No more than 10% in 1 share
Max. of 4 companies can have max holding of 10%
Any other shares must not exceed 5%
Min. of 16 holdings given the above
Atleast 90% of investments must be in approved securities
Exceptions to diversification rules for UCITS
If replicating index tracker funds then max. holding for one company is 20% (35% in extreme cases)
Lower limit of 6 securities if holding government bonds
What sets, what a scheme can or can’t invest in within an OEIC or trust fund?
Trust deed or scheme booklet
What % can UCIT, QIS’s and Non-UCITS gear upto and which one can be permanent?
10% and Non-UCITS can be permanent
Upto 100% of net asset value for QIS’s
Unregulated Collective Investment Scheme (UCIS)
Unregulated investment so cannot marketer itself in the UK to retail clients
AIF 3 main aims?
Enhance supervisory practices to prevent market instability
Improve investor protection
Promote efficiency and competition
4 Rules of a unit trust
Trustee legally owns assets
Manager is responsible for day to day running
Can only be constituted if signed a trust deed
Regulated by FCA and manager is authorised by the FCA
How to remove a unit trust manager?
If receive a majority vote from unit holders
What is the purpose of the register in a unit trust?
Hold information on unit holders name, holding amount and type, date unit was registered
Who is responsible for ensuring the register of a unit trust is upto date?
Both trustee and manager of unit trust
How often are reports are done for a unit trust?
Half yearly
Difference between an accumulation unit trust and income unit trust and mixed fund unit trust
Accumulation - All income produced is put back into investment
Income - pays income to investor
Mixed fund - mix of the above
What must be provided to purchase a unit trust OEIC and investment trust?
Key features document or key investor information document
Within what time-frame must a payment be made when a unit trust unit is sold by an investor?
Manager of fund must pay within 4 days after receipt of signed document
What is the difference between single and dual priced unit trusts
This is how units are quoted:
Dual price - different price to buy and sell so difference is usually charges
Single price - same price to buy and sell. Charges are usually separate
What is the bid and offer price?
Bid price - price selling at
Offer price - price buying at
What is the bid offer spread?
Difference in price between buying and selling units including costs
Unit trust box management
When a unit trust buys back units it then sets them a side to reissue to another investor and are not cancelled
How to price a unit trust is based on future or past value meaning?
Historic value so buy at yesterdays published price
Future value so buy at tomorrows yet to be calculated price
OEIC
Set up as a limited company and find is split into shares which are unlimited and handled by a fund manager, known as the authorised corporate director
Most OEIC operate on a what priced basis?
Single price
Main differences between OEIC and unit trust
OEIC
- limited company
- issue shares
- Ran by directors
- Safeguarded by a depository
Unit trust
- trust structure
- issues units
- ran by a manager
- safe guarded by trustees
What is a manager of managers trust fund/OEIC?
A manager is appointed to find the best fund managers in each sectors to invest funds
What is a fund of funds trust fund/OEIC? (Fettered and unfettered)
Fettered - spread investment across several funds
Unfettered - investments in funds and companies therefore more expensive
FCA 3 categories for offshore funds
UCITS - auto recognition from FCA
Designated territories - FCA sees as equal protection to UK
Non designated territories - not recognised by the FCA and prohibited from marketing in the UK
What is the European Union savings directive and what did this change to?
Auto exchange of information between member states
Changed to council directive
Are investment trusts perceived as higher or lower risk than OEIC & trust funds?
Higher risk
What is an investment trust
Traded as a public limited company but they invest in other companies or investments
How do you calculate the net asset value of an investment trust?
Assets - liabilities
Can divide by number of shares to get net asset value per share
Types of investment trust
Conventional - issue one main class of equity shares
Split capital - issue multiple classes of shares and usually has a fixed wind-up date
What is a limited life investment trust?
Set maturity date of investment trust and at end date the NAV is distributed
What is a hurdle rate when dealing with split capital investment trusts?
When an investment trust has a fixed maturity date, it is the rate at which the investment must grow at to pay each class of share on the wind up date
Scoring an asset cover for an investment trust
Asset cover of 1 - trusts asset exactly match the money required to repay all share classes at wind up
Over 1 - assets more than liabilities
Below 1 - assets less then liabilities
What is a split capital share?
Give entitlement to income, capital or dividends
What are warrants in regards to investment trusts?
Right to buy shares at a fixed price at a fixed date
Are warrants for investment resists tradable on the stock exchange?
Yes
When a warrant is executed, how does this effect the NAV?
It becomes diluted
What can an investment trust do that a trusts fund or OEIC cannot do?
Use gearing
What is gearing?
Ability to lend money to buy shares in other assets
What does 100 mean regarding gearing?
What does 130 mean regarding gearing?
100 - no gearing
130 - company is 30% geared
Are investment trusts usually more or less expensive than an OEIC or unit trust?
Less expensive
With profits based policy
Non profit policy
With- If payments are met then a fixed price of sum assured will be paid to policy holder at some point. But can return lower than expected if investments do not go to plan
Non - regular bonus payments are added to the sum assured for redemption date. But can return lower than expected if investments do not go to plan
Types of bonuses for with profit policies:
Annual
Terminal
Special
Annual - given annually based upon performance
Terminal - find manager reviews performance from start of investment and bonus given based upon this
Special - awarded if exceptionally good returns in 1yr
Traditional With profit policy
Low cost with profit policy
Traditional - bonuses paid each year which increase sum assured
Low cost - DTA life policy instead
Market value reduction
Like an ERC when fund has performed badly due to market reductions. So reduces value when withdrawing from fund at certain times.
What is pound cost averaging
Benefit from fluctuating prices by paying monthly rather than lump sum eg buying 100 shares when price is at 50p, 25 shares when price is £1, buying 100 shares when price is 50p again.
Maximum investment plan investment limit?
£3,600 per yr
Segments of an investment bond
Split investments into categories of assets which are proportionally identical
Unitised with profits based investment
Value of unit price cannot go down and invested in several sectors and asset classes
How much can you with draw from a bond each year without being taxed? And is it cumulative? And when are they taxed?
5% and yes and taxed when withdrawn 100% of their original investment amount
What is a bond?
Gives bonuses each year and returns original investment at the end of the term
High income bond
Based on packed derivatives so depend on performance of those investments
Guaranteed growth bond
All income made is added to capital at maturity and paid in full
Unit linked bond
Have no maturity date so have a whole of life policy and can be cashed at any time. Income can be taken or rolled up.
Distribution bond
Must have a maximum equity content of 60% and a yield of atleast 110% of the FTSE all share index.
Guaranteed equity and protected bonds
Guarantees 100% of equity and 90% for bonds. Investment is linked to an index
Hard protection and soft protection on a bond
Hard - capital guarantee exists
Soft - protection subject to conditions
Child benefit limit when will income hinders amount received?
£50k income
Friendly society investment limits
£270 per annum or £25per month for total amount invested not per policy
Age restriction for friendly society policy
No age restrictions
Is there any tax for friendly society or buyer on friendly society policy?
None
Exchange traded funds
Tracker products following an index
Why do exchange traded funds have a tracker error?
Due to charges, there is a distortion with index performance and performance of the fund
Exchange traded commodity
Tracks a commodity price
Exchange traded notes are issued by who? And what are they?
Banks, they track a currency
Synthetic fund
Uses swaps (a type of derivative) to replicate the index without actually holding the asset
What fund is always synthetic?
Exchange traded notes
What type of trusts can buy shares in property?
Authorised trusts
Difference between property unit trusts and investment trusts
UT - can borrow to buy in property and unit price must match the NAV
IT - can borrow but reluctant to do so heavily and share price is independent of the NAV
Both often come with a 6month tie in so unable to withdraw funds
Insurance company property bonds
Life assurance company with a fund specialising in commercial property with value of units directly linked to value of property
Real estate investment trust
Close ended company which is listed on the stock exchange. Stamp duty payable by trust also issuing only 1 class of share.
Ring fenced (non taxable)and non ring fenced real estate (taxable) investment trust CGT rules
Ring fenced - property letting business as main element and exempt from corporation tax on certain sales
Non ring fenced - all other property services such as property management etc. subject to coroporation tax
Retail estate investment trust 4 conditions
- Must be atleast 75% from ring fenced element
- Interest on borrowings atleast 125% covered by rental profits
- atleast 90% of ring fenced elements profit must be distributed within 12 months from end of accounting period
- property develops allowable providing for profit purposes in the future
Are dividends ring fenced or non ring fenced for real estate investment trusts
Non-ring fenced (taxable)
Property authorised investment fund
Authorised fund that moves tax treatment from fund to the investor
Property authorised investment fund 3 conditions
Atleast 60% of income and assets must be in property
Max of 10% can be owned by 1 person
Must be widely availbek
What is a knowledge intensive company 3 criteria?
- must have spent atleast 15% of costs on innovation or R&D and in the process of inventing intellectual property
or
- atleast 20% of employees hold a higher education and get directly involved in R&D
Enterprise investment scheme, seed enterprise investment scheme and venture capitalist trust
EIS - help small companies with investment by giving tax relief
SEIS - help start ups with investment and tax relief
VCT - collective investment ran by a fund manager buying shares in smaller companies
What 2 ISA’s must you be 18 to own?
Stocks and shares, innovation finance ISA’s
If someone dies what happens to an ISA’s tax exempt status?
Immediately lost and forms part of the estate unless for spouse
What happens if someone with an ISA dies and passes estate to spouse?
Annual subscription increased on top of £20k allowance for spouse to move funds into their name and have 3yrs to switch names from date of death
Cash ISA
Deposit based investment with interest tax free
What ISA can UCITS not be held in?
Stocks and shares ISA
Innovation finance ISA
Peer to peer lending
Life time ISA
Max of £4per yr
25% bonus given for 1st house or retirement
Start 18-40, invest until 50, withdraw from 60
HTB ISA
Max £1k initially with £200pm limit and £12k limit total
25% bonus for FTB
Stakeholder products
Low charge products available to customers
Cash ISA min. premium and min. interest
Min. £10 premium
Min. interest of 1% below base rate
Stocks and shares ISA min. premium?
£20 per month
ISA transfer 3 rules:
Current tax yr can only be transferred in full. Where as previous yr can be in parts
Cash to cash ISA must complete within 15 days and others within 30 days
Innovation finance cannot be transferred between providers but can be transferred to cash then transfer
Child trust fund
Gov. gives a £250 voucher that is invested and was told would get further £250
Child trust fund max. contribution
£9k per birth yr
Can a person have a child trust fund and a Junior ISA?
No but can transfer
ISA’s contribution limits go from tax yr or calendar yr?
Tax yr
Purchased life annuity
Give lump sum to be paid income til death
Derivative
Agreement to buy or sell at a set price at a set future date
Can a derivative agreement be sold or bought?
Yes
What is a future regarding a derivative?
Legally binding agreement to buy or sell an asset at a set date
What is an option when referring to a derivative?
Option to buy or sell at a set future date
Variation margin of a future on a derivative
When the collateral sits with the side with the side destined to make a profit as less likely to default (the side who gets more profit gets more margin as in profit margin)
Marking to market on derivatives
The process of revaluing derivatives daily
Call option of a derivative
Put option of a derivative
Call option - gives option buyer right to buy if they wish
Put option - gives option buyer right to sell if they wish
European option of a derivative
American option of a derivative
EU - can only be exercised at expiry
US - can be exercised any time upto expiry
What is writing an option on a derivative?
Selling an option
Hedge funds
Fund manager with a pool of investments
What is a fund of fund hedge fund
Spread investors money over a range of hedge funds
What is an absolute return fund?
A fund that tried to make a return regardless of market conditions. Essentially the hedge fund of the UK
Sharia compliant investment
Does not pay or receive interest
Does not invest in anything against Muslim values
What is an equalisation payment for a unit trust?
Enables unit trust to distribute dividends equally rather than based upon time owned as CGT then due for investor on gains made instead of income tax
Max. contribution within a qualifying life assurance investment
£3,600 per annum
Personal savings allowance of CGT?
£12,570
