7 - Indirect investments Flashcards
If a fund does not have initial charge what may be applied instead
Exit charge
What do balance funds look for
Mixture of capital and income growth
Who regulates sale and marketing of unit trusts and OEICS
FCA
How many funds are on sale in UK
4000
What are some broad groups of Investment Association sectors
5
Capital Protection
Income
Growth
Specialist funds
Prinicipally targeted on an outcome (targeted absolute return)
Who are the IA sectors overseen by
Overseen by sectors committee
Independent monitoring company checks funds
How often do these independent monitoring company check IA sectors
monthly
What is the % of funds that must be invested in assets in relevant asset class at least
80%
For income fund what is the % of yield that the fund must obtain
what are the relevant index that often show these
90% of relevant index on annual basis (MSCI WORLD INDEX or FTSE all share)
What are alternative methods to index-tracking funds
Sampling (stratification)
Computerised model (optimisation)
What is the specialist handbook for funds and investment
Collective investment schemes by FCA
What does the trust deed must contain
That the fund may invest in any securities or deriviatives market that is eligible under FCA regulations
Who monitors the investment limits to ensure funds are managed in accordance to trust deeds
Trustee or depository
What is the % of securities must be in approved securities
At least 90%
How many standards must trust managers and trustees must follow to be a eligible market
4
Market must be:
Regulated
Operating regularly
recognised
Open to public
How often does firms have to carry out annual review of market
Yearly
What is the responsibility of fund managers to ensure that unit trusts and OEICs are diversified
FCA imposed obligation in relation to Undertakings for Collective Investment in Transferable Securities
How much can a UCTIS fund in securities hold in one company
A UCTIS Fund investing in securities and not index tracker is prohibited from holding more than 10% of value of fund in shares of any one company
How many separate shareholdings can the fund invest in? (UK UCITS fund securities)
Only four
to Maximum of 10% holding
What is the minimum holdings does a UCTIS security fund must have
A minimum of 16
A UK UCTIS scheme as replicating tracker fund how much can they hold of fund in one company
20% - sometimes 35%
What is the % of Government fixed insecurities that funds invest in where they must invest in at least 6 different stock
> 35%
What is the % of UK UCITS scheme can hold unlisted securities
Up to 10% of fund value
What about non UK UCITS can hold unlisted securities
Up to 20% of fund value
How much % of cash can funds hold according to IA sector rules
no more than 20%
What is the amount fund managers hold in cash of fund assets
5%
How much can a UK UCITS scheme borrow of fund properties
10% - temporary
What scheme allows for 100% of NAV of scheme property to be borrowed
Qualified investor scheme
What is the difference in UCITS and UCIS
UCITS - FCA requirements and marketed to retail investors
UCIS - unregulated schemes
What is a NMPI
Non mainstream pooled investment (UCIS)
Name some examples of non - NMPIS
Exchange traded products
Overseas investment companies that would meet criteria of investment trust in UK
Real estate investment trusts
Venture capital trusts
Enterprise investment schemes
SPVS pooling investments primarily in shares and bonds
Name some examples of NMPIS
Units in QIS (qunatitative investment solutions)
Traded life policy investments
Units in UCIS
Securities issued by spvs issuing investment in assets other than unlisted shares/bonds
What are AIFS
Alternative Investment Fund Managers Directive - regulatory framework for alternative investment fund managers.
Who can QIS be marketed to
Professional clients or sophisticated investors
How can a unit trust only be constituted
Signing of trust deed
What must the trustee be according to the FCA
They must be regulated
What must the manager be in a UNIT trust?
Authorised to conduct investment business in UK
What must the UNIT trust be to be marketed in UK
Authorised by FCA
What is the trustee normally (organisation)
A large bank or one of major insurance companies
What are key roles of trustee?
Ensure managers actions are in line with regulation, trust deed
Ensuring fund managers invest with objectives
Holding/controlling assets
What can the trustee do if the manager is not performing well
What are some of these conditions
Remove manager if manager goes into liquidation, insolvency or receivership
Wh ois the legal owner of trust assets
Trustee
What is the annual management fee for the manager of unit trust
0.5%-1.5%
What must the manager of unit trust must be
Authorised person by FCA
Adequate financial resources
What do the contents of the Register must include
Name and address of unitholder
Number of units held
Date in which registered
When is the register available open for inspection
During normal office hours - free of charge
May be closed for no more than 30 days in any one year
What do investors receive from trustees/managers instead of certificates
Periodic statements
What must periodic statements/certificates must show
Date
Name of scheme
Name and address of manager and trustee
Number and type of unit held
Name of unit holder
How often do unit trusts must post reports
Annual and half-yearly
Where is the content of the managers report set out
Statement of Recommended Practice for unit trusts
How are unitholder rights protected?
3 levels
Three levels
1. Trustees (safeguard assets)
2. Regulatory organisations under FSMA 2000
3. Complains and arbitration procedures allowing for redress
If a manager wishes to raise changes how long do they have to give unitholders notice
No less than 60 days
How can the manager be removed from unit trust - what must take place
The removal must be approved by FCA
What are interest and rental income taxed at
20% - corporation
How often is income from underlying investment of fund from a unit trust distributed
half yearly
What is equalisation payment
Is it subject to tax?
Partial refund of original capital invested
Not subject to income tax
Must be deducted from purchase price of unit to identify CGT
What is used to detail how an allocation is broken down between franked unfranked income and equalisation
Income distribution vouchers
What distribution do equity funds make
Dividend distribution
What distribution do bond funds make
Interest distributrion
What is the % that unit trust must hold in its investment in interest bearing investments for dividends to be paid
<60%
What is the tax on equity funds when held in discretionary trusts? Who is liable to pay it?
39.35% - additional rate of dividends tax
Trustee is liable to pay
What is % of tax of gilt and corporate bond funds when held in discretionary trust? Who is liable to pay it
45%
Trustee is liable
Trustees do not get PSA
Are internal gains capital gains within authorised unit trusts taxed?
Exempt from corporation tax
OEICs regulatory structure
Must be authorised by FCA
operated by board of directors
Assets held by independant depository
ACD and depository must be authorised
Sales and marketed regulated through COBS
Where are further regulations set out apart from COBS for OEICS
FCA sourcebooks FUND and COLL
Differences in OEIC to Unit trusts
Self contained company
Issues shares rather than units
Requires independent depository
Single pricing is used
What is the equivalent of unit trust manager in OEICs
ACD
How often should an OEICs scheme operator report to holders
Twice a year
- once at interim stage
- once at annual stage
What reports should be produced by OEICs scheme operator
Ones that comply with OEICs statement of recommended practice
What is the dilution levy
A charge to single price on share
What is the dilution levy paid for
Paid into fund to cover dealing cost and spread between buying and selling of underlying investment
How can OEICs avoid dilution levy
OEICs and single priced unit trusts collect dealing costs that have been incurred as a result of investor transaction when the redeem funds through adjustment to mid market price
OEICs advantage
Recognised
More flexible charging
Allows for umbrella funds
What is the taxation for OEICs
Corporation tax on income received, less chargeable expenses
Dividend - dividends are paid without tax
Interets payment - paid gross (fixed interest funds)
Internal gains (exempt from corporation tax)
Personal CGT liability on sale of OEIC
Multi manager product categories
Fund of funds
Manager of manager funds
What is a fund of fund
Invest directly into funds managed by other managers
What is a manager of manager fund
Appoint specialist investment managers to look after different part of portfiolio
What is a fettered fund of fund
Only invest in funds run by same management group
What is unfettered fund of fund
Not obliged to invest solely in internal funds and can select from any fund and management group
How is additional charge on external fund of fund added
Taken out of fund assets - not added to fees
Does fund of fund have CGT
Has a shelter - switching funds does not create CGT liability
Manager of manager fund - how is it allocated
Fund manager deides on asset allocation
Each asset class - investment manager
Fund manager is responsible for competitive managers and monitors buy/sell
What is TMPR
Temporary Marketing Permission Regime
What does TMPR ALLOW
certain funds from EEA to be marketed in UK in same fashion.
Last 3 years from exit day (until end of 2025)
What is the most common type of investment fund in Europe
SICAV - societe d investissement a capital variable
Can a Fund be sold cold calling
NO
What happens if fund manager is not a member of UK regulatory body
All advertisements need to be approved by a member of suitable regulator
What is a reporting fund - Taxed
Dividends and IR taxed same way as UK based funds
CGT - CGT rules (fund must have retained reporting status all time through ownership)
Dividends from companies taxed as foreign dividends - subject to income tax in same way as dividends from equities
Where offshore fund holds more than 60% of asset in interest bearing securities - taxed as progressive rate
Income can be offset against PSA
Does a reporting fund have to distribute all income
No but must report to HMRC
What are non-reporting funds
Roll up funds - income is accumulated and no dividends paid
How is non reporting funds taxed
Gains on disposal - CGT
No CGT exempt can mitigate as tax liability is taxed as income
Gains taxed to income tax - progressive - NO PSA relief
Can be used to shelter accumulated income - when tax rates have been dropped
Offshore income can be free of uk tax (non-resident)
For those who are resident but not domiciled - taxed on remittance basis
Non domicied residence - gain IHT benefit
Taxation treatment of funds
Offshore
Offshore equities - dividend subject to non-reclaimable witholding tax
Fixed interest securities - tax free income
Offshore fixed interest funds more tax efficient than offshore equity funds
What is AEOI
Automatic exchange of information
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What does AEOI allow
Stop tax avoidance - exchange of information of tax
What is advantage of currency offshore
Umbrella funds
Switching between funds is easy
Can capitalise on ER
What is the biggest single bond fund sector
International fixed interest
What is an investment trust
Collective investment that pools the money investors spreading across diversified portfolio of stocks and shares
What are investment trust subject to
Articles of association
Who are the AIC
Association of investment companies
How do investment trust companies work
Issue fixed number of shares (closed ended funds)
Regulated by company law
Shares traded on LSEG
What is an advantage of investment trust
Fixed capital structure - long term view with investments
They can gear up
Who is investment trust run by
Independent board of directors
What is NAV of investment trusts
Total value of investments - liabilities
Usually expressed as amount per ordinary share
NAV per share definition
Available shareholders fund/ ordinary share in issue
What is the diluted NAV per ordinary share
Assumes all outstanding warrants and convertible loan stocks are exercised something undiluted NAV does not - more realistic figure of NAV
What is discount on NAV share
Difference between share price and NAV per share - buying asset at lower price
What is a measurement of investment performance
NAV return including reinvested income
What is narrowing discount
Provides better return on share price than on underlying assets
What is widening of discount
Reduce gain an investor can possibly receive - if discount is wide manager seek to buy some trust shares to reduce oversupply
Who does an investment turst company have to regulate by
Companies Act
FCA
HMRC
Do investment trust directly deal with public
no - management company or subsidary company through savings and investment schemes
Who must investment trust be authorised of investment business by
FSMA 2000
What are some principles laid out by FCA for company seeking a listing on investment trust
Investment managers experience
Adequate spread of risk
Company must not actively involved in company which it invests
Trust must not be dealer of investment
Trust must have board that act independently of management
What are the two types of investment trust can be split into
Conventional trust
Split capital trust
What is conventional trust
Issue one main class of equity share - ordinary share
What is limited life investment trusts
New conventional trusts - limited lives. Shareholders can extend life for 3 years. It helps reduce discount
What is split capital investment trust
What can it offer? What is it lifespan
Have one portfolio of investment that can produce both growth and income but multiple classes of shares (different returns)
Can offer units
Limited life span 5-10 years
What is redemption yield
The redemption yield shows the total return as an annual percentage. It assumes that the shares are bought at the current price, held until redemption and that the assets and dividends payable (for share classes entitled to dividends) grow at the rate assumed.
What is an equity redemption yield
Shows a similiar annual % but base reutn only on growing equity portion holding cash and fixed interest constant
What is hurdle rate
Indicates annual growth that company investment must grow to
- repay each class of share at wind up date at either current purchase price, pre determine redemption value or repay prior charges
What is asset cover
Who takes priority?
Ratio by which pre-determined redemption value for a class of shares is currently covered by those assets of the company that are available for them
Any shares ranking for pror payment are taken into account fist
What happens when a split capital trust reaches redemption
Instead of “winding up” (cashing out) - offer roll-over which is new investment trust of similiar nature to not occur CGT liability
What are the difference classes of shares
Ordinary
Preference
Split capital shares
Warrants
What is an ordinary share
Shares entitled to income and capital growth from trust investments
What is Preference shares
Conventional investment trust preference shares pay a fixeddividend, which must be paid before any income is distributed to ordinary shareholders. Take priroity of claim to assets in event of winding up.
What is split capital share
Two classes of share
- Income Share - entitled to income received by investment trust and predetermined capital return when trust is wound up
- Capital share - no entitlement to income, but receive remainder of asset on wind up
What is zero-dividend preference share
It is a hybrid security with features of both debt and equity, and it offers investors the potential for capital appreciation without the regular income stream that dividends provide
What is a warrant
What do they provide
Warrants are not shares but the right to buy shares at a fixedprice at a pre-determined date or within a specified period in the future.
No income
Investment - high risk, high reward
Price of warrant is fraction of share price
No income tax - no dividend (Taxed under CGT)
Who is eligible for split capital investment
What type of shares below would they buy if they wanted:
High income
Income and Capital protection
Combination of income and capital protection and risky
Do not want income - want capital growth
Possibility of higher capital growth and higher risk
Require very high income - annuity shares
Require income and capital protection purchase traditional income shares
Require combination of income and capital growth can take on higher risk - income and residual capital shares
Do not require income and want capital growth - zero dividend shares
Seeking possiblity of higher capital growth and higher risk - capital shares
What is a share buyback used to target
Company’s discount
Company purchases its own shares
What is gearing
Borrow money to buy shares and other assets but do not have sufficient free capital availalbe to take advantage
Gearing formulae
(Total gross assets / net assets) * 100
What is structual gearing
Different classes of shares having varying levels of risk
Who pays for investment managers cost
AMC
What are the other expenses in funds
Custody and auditors fees
Directors remuneration
marketing
What is the OCF
The OCF is a single percentage figure that shows the proportion of a fund’s assets which are consumed by the AMC and other operating charges incurred during the period under review, usually a year.
How is a KID prescribed
No more than three sides a4
Written in non-technical language
Avoids jargon
What does a KID include
This contains essential information regarding the productfeatures including a table showing the effect of charges and expenses at the end of one, three and five years.
What is the taxation on investment trust companies
Approved by HMRC - no tax on gains from sale of shares or other holdings
Not subject to additional tax on franked income (dividend income from shareholdings in UK company)
No corporation tax on unfranked income (interest from gilts and bank deposits)
What is the taxation of the investor in investment trust
Divdend tax
CGT on profit
If held in ISA is tax free
What if investment companies offshore
No tax
What is an TEF
Tax-elected funds
What does having a TEF allow investing company to do
Allows funds to elect to divide distributions into two income parts UK dividend an non - dividend (interest) which are then taxed in normal way.
Moves tax into investor - so they are taxed if they had invested in underlying assets directly
How can income received be used for investor from unit trusts
unitholder can choose date when income received - by investing in range of unit trusts with specific of distribution dates
Increase unitholder investment (accumulation units or income reinvestment plans)
Note (income is still taxed)
What is accumulation units
These add all the income produced from the underlyinginvestments into the investor’s holding. Relative to income units, the unit price increases to reflect the retained income.
What is income units
These pay out the income of the unit trust to the investor. The price of income units (sometimes called distribution units) will therefore be lower than that of accumulation units.
What is the maxiumum ex distribution period
No more than 4 months after each end of annual or interim accounting period
What happens if unithodlers sell thewir unit during ex-distribution period
They receive allocation attributable to previous record, buyers dno not
What is an ex distribution period
A stock or any other asset is termed ex-distribution if it is sold without the right of the new owner to collect a specific scheduled payment, such as a dividend. That right belongs to the previous owner and the price is adjusted accordingly.
What must investors be supplied with to get a unit trust
KIID - Key investor information document - detailing fund
How do you sell units of unit trust?
Order is placed with management group who will issue contract note
What are Share exchange facilities
allow investors to exchange existing shareholdings in public companies for an equivalent value in the fund’s units.
What is FCA formula for dual pricing
– the highest price at which units can be sold to investors;
and
– the lowest price at which the manager can repurchase units from investors
What can managers do for unit trusts unlike investment trusts regards to units
Create more or cancel existing units as its open ended
Single pricing - unit trusts how do they do this
Mid-market pricing for underlying investments. Income and outgoing investors deal at same time and charges disclosed separately.
How to calculate buying price (dual pricing basis)
Take price of buying underlying security at published valuation point
Add dealing cost of buying securities
Add on all other property of trust (uninvested cash, accured income less tax, expenses)
Divide by number of units issued
Add on any initial charge and express price to 4sgf
How to calculate selling price (dual pricing)
Value underlying securities at best market price
Deduct edaling cost that would be incurred
Add in any uninvested cash
Add any accured income after deduction after fees (trustee, audit, outstanding tax)
Divide total by number of units
Express to sigfig
What is bid-offer spread
Difference in buying and selling price including dealing cost and intial charge
What is offer basis
If demand is high, the manager will set the buying price at the offer end of the spectrum,
What is bid basis
if demand is low, and more units are being redeemed than being sold, the manager will choose a selling
price at the bid end of the range
What is the box
Investors buy and sell units via transactions with the manager who may hold units in the ‘box’. The box may be made up of created (new) units or units that have been repurchased from investors.
Whis responsible to carry out regular valuations of property of unit trust scheme under FCA
The manager
How often are unit trusts valued?
Daily
What are unit trusts priced on
Either forward pricing
Or historic pricing
What happens if manager runs out of units on historic pricing
If they run out of units, the manager must either move to a forward basis or continue on an historic basis, and risk losing money if the market moves unfavourably. They must create units to cover the oversold position at the next valuation point, when the creation price may rise.
What is OCF
Ongoing charges figure
