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R02 - 2023 > 7 - Indirect investments > Flashcards

7 - Indirect investments Flashcards

1
Q

If a fund does not have initial charge what may be applied instead

A

Exit charge

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2
Q

What do balance funds look for

A

Mixture of capital and income growth

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3
Q

Who regulates sale and marketing of unit trusts and OEICS

A

FCA

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4
Q

How many funds are on sale in UK

A

4000

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5
Q

What are some broad groups of Investment Association sectors

5

A

Capital Protection
Income
Growth
Specialist funds
Prinicipally targeted on an outcome (targeted absolute return)

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6
Q

Who are the IA sectors overseen by

A

Overseen by sectors committee
Independent monitoring company checks funds

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7
Q

How often do these independent monitoring company check IA sectors

A

monthly

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8
Q

What is the % of funds that must be invested in assets in relevant asset class at least

A

80%

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9
Q

For income fund what is the % of yield that the fund must obtain

what are the relevant index that often show these

A

90% of relevant index on annual basis (MSCI WORLD INDEX or FTSE all share)

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10
Q

What are alternative methods to index-tracking funds

A

Sampling (stratification)
Computerised model (optimisation)

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11
Q

What is the specialist handbook for funds and investment

A

Collective investment schemes by FCA

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12
Q

What does the trust deed must contain

A

That the fund may invest in any securities or deriviatives market that is eligible under FCA regulations

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13
Q

Who monitors the investment limits to ensure funds are managed in accordance to trust deeds

A

Trustee or depository

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14
Q

What is the % of securities must be in approved securities

A

At least 90%

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15
Q

How many standards must trust managers and trustees must follow to be a eligible market

A

4
Market must be:
Regulated
Operating regularly
recognised
Open to public

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16
Q

How often does firms have to carry out annual review of market

A

Yearly

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17
Q

What is the responsibility of fund managers to ensure that unit trusts and OEICs are diversified

A

FCA imposed obligation in relation to Undertakings for Collective Investment in Transferable Securities

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18
Q

How much can a UCTIS fund in securities hold in one company

A

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

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19
Q

How many separate shareholdings can the fund invest in? (UK UCITS fund securities)

A

Only four
to Maximum of 10% holding

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20
Q

What is the minimum holdings does a UCTIS security fund must have

A

A minimum of 16

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21
Q

A UK UCTIS scheme as replicating tracker fund how much can they hold of fund in one company

A

20% - sometimes 35%

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22
Q

What is the % of Government fixed insecurities that funds invest in where they must invest in at least 6 different stock

A

> 35%

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23
Q

What is the % of UK UCITS scheme can hold unlisted securities

A

Up to 10% of fund value

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24
Q

What about non UK UCITS can hold unlisted securities

A

Up to 20% of fund value

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25
Q

How much % of cash can funds hold according to IA sector rules

A

no more than 20%

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26
Q

What is the amount fund managers hold in cash of fund assets

A

5%

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27
Q

How much can a UK UCITS scheme borrow of fund properties

A

10% - temporary

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28
Q

What scheme allows for 100% of NAV of scheme property to be borrowed

A

Qualified investor scheme

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29
Q

What is the difference in UCITS and UCIS

A

UCITS - FCA requirements and marketed to retail investors
UCIS - unregulated schemes

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30
Q

What is a NMPI

A

Non mainstream pooled investment (UCIS)

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31
Q

Name some examples of non - NMPIS

A

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

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32
Q

Name some examples of NMPIS

A

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

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33
Q

What are AIFS

A

Alternative Investment Fund Managers Directive - regulatory framework for alternative investment fund managers.

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34
Q

Who can QIS be marketed to

A

Professional clients or sophisticated investors

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35
Q

How can a unit trust only be constituted

A

Signing of trust deed

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36
Q

What must the trustee be according to the FCA

A

They must be regulated

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37
Q

What must the manager be in a UNIT trust?

A

Authorised to conduct investment business in UK

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38
Q

What must the UNIT trust be to be marketed in UK

A

Authorised by FCA

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39
Q

What is the trustee normally (organisation)

A

A large bank or one of major insurance companies

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40
Q

What are key roles of trustee?

A

Ensure managers actions are in line with regulation, trust deed
Ensuring fund managers invest with objectives
Holding/controlling assets

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41
Q

What can the trustee do if the manager is not performing well

What are some of these conditions

A

Remove manager if manager goes into liquidation, insolvency or receivership

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42
Q

Wh ois the legal owner of trust assets

A

Trustee

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43
Q

What is the annual management fee for the manager of unit trust

A

0.5%-1.5%

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44
Q

What must the manager of unit trust must be

A

Authorised person by FCA
Adequate financial resources

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45
Q

What do the contents of the Register must include

A

Name and address of unitholder
Number of units held
Date in which registered

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46
Q

When is the register available open for inspection

A

During normal office hours - free of charge
May be closed for no more than 30 days in any one year

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47
Q

What do investors receive from trustees/managers instead of certificates

A

Periodic statements

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48
Q

What must periodic statements/certificates must show

A

Date
Name of scheme
Name and address of manager and trustee
Number and type of unit held
Name of unit holder

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49
Q

How often do unit trusts must post reports

A

Annual and half-yearly

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50
Q

Where is the content of the managers report set out

A

Statement of Recommended Practice for unit trusts

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51
Q

How are unitholder rights protected?

3 levels

A

Three levels
1. Trustees (safeguard assets)
2. Regulatory organisations under FSMA 2000
3. Complains and arbitration procedures allowing for redress

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52
Q

If a manager wishes to raise changes how long do they have to give unitholders notice

A

No less than 60 days

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53
Q

How can the manager be removed from unit trust - what must take place

A

The removal must be approved by FCA

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54
Q

What are interest and rental income taxed at

A

20% - corporation

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55
Q

How often is income from underlying investment of fund from a unit trust distributed

A

half yearly

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56
Q

What is equalisation payment

Is it subject to tax?

A

Partial refund of original capital invested
Not subject to income tax

Must be deducted from purchase price of unit to identify CGT

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57
Q

What is used to detail how an allocation is broken down between franked unfranked income and equalisation

A

Income distribution vouchers

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58
Q

What distribution do equity funds make

A

Dividend distribution

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59
Q

What distribution do bond funds make

A

Interest distributrion

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60
Q

What is the % that unit trust must hold in its investment in interest bearing investments for dividends to be paid

A

<60%

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61
Q

What is the tax on equity funds when held in discretionary trusts? Who is liable to pay it?

A

39.35% - additional rate of dividends tax
Trustee is liable to pay

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62
Q

What is % of tax of gilt and corporate bond funds when held in discretionary trust? Who is liable to pay it

A

45%
Trustee is liable
Trustees do not get PSA

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63
Q

Are internal gains capital gains within authorised unit trusts taxed?

A

Exempt from corporation tax

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64
Q

OEICs regulatory structure

A

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

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65
Q

Where are further regulations set out apart from COBS for OEICS

A

FCA sourcebooks FUND and COLL

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66
Q

Differences in OEIC to Unit trusts

A

Self contained company
Issues shares rather than units
Requires independent depository
Single pricing is used

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67
Q

What is the equivalent of unit trust manager in OEICs

A

ACD

68
Q

How often should an OEICs scheme operator report to holders

A

Twice a year
- once at interim stage
- once at annual stage

69
Q

What reports should be produced by OEICs scheme operator

A

Ones that comply with OEICs statement of recommended practice

70
Q

What is the dilution levy

A

A charge to single price on share

71
Q

What is the dilution levy paid for

A

Paid into fund to cover dealing cost and spread between buying and selling of underlying investment

72
Q

How can OEICs avoid dilution levy

A

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

73
Q

OEICs advantage

A

Recognised
More flexible charging
Allows for umbrella funds

74
Q

What is the taxation for OEICs

A

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

75
Q

Multi manager product categories

A

Fund of funds
Manager of manager funds

76
Q

What is a fund of fund

A

Invest directly into funds managed by other managers

77
Q

What is a manager of manager fund

A

Appoint specialist investment managers to look after different part of portfiolio

78
Q

What is a fettered fund of fund

A

Only invest in funds run by same management group

79
Q

What is unfettered fund of fund

A

Not obliged to invest solely in internal funds and can select from any fund and management group

80
Q

How is additional charge on external fund of fund added

A

Taken out of fund assets - not added to fees

81
Q

Does fund of fund have CGT

A

Has a shelter - switching funds does not create CGT liability

82
Q

Manager of manager fund - how is it allocated

A

Fund manager deides on asset allocation
Each asset class - investment manager
Fund manager is responsible for competitive managers and monitors buy/sell

83
Q

What is TMPR

A

Temporary Marketing Permission Regime

84
Q

What does TMPR ALLOW

A

certain funds from EEA to be marketed in UK in same fashion.

Last 3 years from exit day (until end of 2025)

85
Q

What is the most common type of investment fund in Europe

A

SICAV - societe d investissement a capital variable

86
Q

Can a Fund be sold cold calling

A

NO

87
Q

What happens if fund manager is not a member of UK regulatory body

A

All advertisements need to be approved by a member of suitable regulator

88
Q

What is a reporting fund - Taxed

A

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

89
Q

Does a reporting fund have to distribute all income

A

No but must report to HMRC

90
Q

What are non-reporting funds

A

Roll up funds - income is accumulated and no dividends paid

91
Q

How is non reporting funds taxed

A

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

92
Q

Taxation treatment of funds

Offshore

A

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

93
Q

What is AEOI

A

Automatic exchange of information

94
Q

```

~~~

What does AEOI allow

A

Stop tax avoidance - exchange of information of tax

95
Q

What is advantage of currency offshore

A

Umbrella funds
Switching between funds is easy
Can capitalise on ER

96
Q

What is the biggest single bond fund sector

A

International fixed interest

97
Q

What is an investment trust

A

Collective investment that pools the money investors spreading across diversified portfolio of stocks and shares

98
Q

What are investment trust subject to

A

Articles of association

99
Q

Who are the AIC

A

Association of investment companies

100
Q

How do investment trust companies work

A

Issue fixed number of shares (closed ended funds)
Regulated by company law
Shares traded on LSEG

101
Q

What is an advantage of investment trust

A

Fixed capital structure - long term view with investments
They can gear up

102
Q

Who is investment trust run by

A

Independent board of directors

103
Q

What is NAV of investment trusts

A

Total value of investments - liabilities
Usually expressed as amount per ordinary share

104
Q

NAV per share definition

A

Available shareholders fund/ ordinary share in issue

105
Q

What is the diluted NAV per ordinary share

A

Assumes all outstanding warrants and convertible loan stocks are exercised something undiluted NAV does not - more realistic figure of NAV

106
Q

What is discount on NAV share

A

Difference between share price and NAV per share - buying asset at lower price

107
Q

What is a measurement of investment performance

A

NAV return including reinvested income

108
Q

What is narrowing discount

A

Provides better return on share price than on underlying assets

109
Q

What is widening of discount

A

Reduce gain an investor can possibly receive - if discount is wide manager seek to buy some trust shares to reduce oversupply

110
Q

Who does an investment turst company have to regulate by

A

Companies Act
FCA
HMRC

111
Q

Do investment trust directly deal with public

A

no - management company or subsidary company through savings and investment schemes

112
Q

Who must investment trust be authorised of investment business by

A

FSMA 2000

113
Q

What are some principles laid out by FCA for company seeking a listing on investment trust

A

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

114
Q

What are the two types of investment trust can be split into

A

Conventional trust
Split capital trust

115
Q

What is conventional trust

A

Issue one main class of equity share - ordinary share

116
Q

What is limited life investment trusts

A

New conventional trusts - limited lives. Shareholders can extend life for 3 years. It helps reduce discount

117
Q

What is split capital investment trust

What can it offer? What is it lifespan

A

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

118
Q

What is redemption yield

A

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.

119
Q

What is an equity redemption yield

A

Shows a similiar annual % but base reutn only on growing equity portion holding cash and fixed interest constant

120
Q

What is hurdle rate

A

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
121
Q

What is asset cover

Who takes priority?

A

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

122
Q

What happens when a split capital trust reaches redemption

A

Instead of “winding up” (cashing out) - offer roll-over which is new investment trust of similiar nature to not occur CGT liability

123
Q

What are the difference classes of shares

A

Ordinary
Preference
Split capital shares
Warrants

124
Q

What is an ordinary share

A

Shares entitled to income and capital growth from trust investments

125
Q

What is Preference shares

A

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.

126
Q

What is split capital share

A

Two classes of share

  1. Income Share - entitled to income received by investment trust and predetermined capital return when trust is wound up
  2. Capital share - no entitlement to income, but receive remainder of asset on wind up
127
Q

What is zero-dividend preference share

A

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

128
Q

What is a warrant

What do they provide

A

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)

129
Q

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

A

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

130
Q

What is a share buyback used to target

A

Company’s discount
Company purchases its own shares

131
Q

What is gearing

A

Borrow money to buy shares and other assets but do not have sufficient free capital availalbe to take advantage

132
Q

Gearing formulae

A

(Total gross assets / net assets) * 100

133
Q

What is structual gearing

A

Different classes of shares having varying levels of risk

134
Q

Who pays for investment managers cost

A

AMC

135
Q

What are the other expenses in funds

A

Custody and auditors fees
Directors remuneration
marketing

136
Q

What is the OCF

A

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.

137
Q

How is a KID prescribed

A

No more than three sides a4
Written in non-technical language
Avoids jargon

138
Q

What does a KID include

A

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.

139
Q

What is the taxation on investment trust companies

A

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)

140
Q

What is the taxation of the investor in investment trust

A

Divdend tax
CGT on profit
If held in ISA is tax free

141
Q

What if investment companies offshore

A

No tax

142
Q

What is an TEF

A

Tax-elected funds

143
Q

What does having a TEF allow investing company to do

A

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

144
Q

How can income received be used for investor from unit trusts

A

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)

145
Q

What is accumulation units

A

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.

146
Q

What is income units

A

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.

147
Q

What is the maxiumum ex distribution period

A

No more than 4 months after each end of annual or interim accounting period

148
Q

What happens if unithodlers sell thewir unit during ex-distribution period

A

They receive allocation attributable to previous record, buyers dno not

149
Q

What is an ex distribution period

A

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.

150
Q

What must investors be supplied with to get a unit trust

A

KIID - Key investor information document - detailing fund

151
Q

How do you sell units of unit trust?

A

Order is placed with management group who will issue contract note

152
Q

What are Share exchange facilities

A

allow investors to exchange existing shareholdings in public companies for an equivalent value in the fund’s units.

153
Q

What is FCA formula for dual pricing

A

– the highest price at which units can be sold to investors;
and
– the lowest price at which the manager can repurchase units from investors

154
Q

What can managers do for unit trusts unlike investment trusts regards to units

A

Create more or cancel existing units as its open ended

155
Q

Single pricing - unit trusts how do they do this

A

Mid-market pricing for underlying investments. Income and outgoing investors deal at same time and charges disclosed separately.

156
Q

How to calculate buying price (dual pricing basis)

A

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

157
Q

How to calculate selling price (dual pricing)

A

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

158
Q

What is bid-offer spread

A

Difference in buying and selling price including dealing cost and intial charge

159
Q

What is offer basis

A

If demand is high, the manager will set the buying price at the offer end of the spectrum,

160
Q

What is bid basis

A

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

161
Q

What is the box

A

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.

162
Q

Whis responsible to carry out regular valuations of property of unit trust scheme under FCA

A

The manager

163
Q

How often are unit trusts valued?

A

Daily

164
Q

What are unit trusts priced on

A

Either forward pricing
Or historic pricing

165
Q

What happens if manager runs out of units on historic pricing

A

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.

166
Q

What is OCF

A

Ongoing charges figure

R02 - 2023 (11 decks)

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