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J10 - Discretionary Investment Management > 7. Investment Funds > Flashcards

7. Investment Funds Flashcards

1
Q

A. Investment funds (page 2)

A

Collective investment are widely used by individuals investors and investment management firms for the following reasons:

  • provide an effective way to invest small sums of money
  • offer access to professional investment management
  • investors can gain access to sectors and market normally difficult to enter
  • risk is reduced by diversification within the portfolio
  • lower costs can be achieved by the pooling of money
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2
Q

A1. Fund management business (pages 2 & 3)

A

UK one of the largest markets for fund management along with the USA and Japan. UK has £7.7 trillion being managed (so second only to the USA).

The Investment Association (IA) is the UK body for the UK-based asset management industry.

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3
Q

A2. Authorisation of funds (page 3)

A
  • the FCA is responsible for authorising funds in the UL
  • those that have been authorised can be freely marketed in the UK
  • FCA only authorises firms that have been sufficiently diversified and invest in a range of premitted assets
  • schemes must have adequate liquidity

The FCA restrictions include limitations on:

  • types of underlying asset
  • asset and sector concentrations
  • levels of gearing
  • use of derivatives

Unauthorised ollective schemes are not illegal, but must be marketed differently.

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4
Q

A2A. Unregulated collective investment schemes and non-mainstream pooled invesments (pages 3 & 4)

A

FCA refers to all unauthorised collective investment schemes (UCIS) as:

‘non-mainstream pooled invesments (NMPIs)’

  • NMPIs are considered higher-risk investments due to the potential greater loss to a client
  • UCIS are considered higher-risk because they lack the same rules and restrictions as a regulated scheme
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5
Q

A2A. Unregulated collective investment schemes and non-mainstream pooled invesments (pages 3 & 4)

UCIS

A

UCIS are considered higher-risk because they lack the same rules and restrictions as a regulated scheme:
- therefore unorthodox methods can be used

Examples of UCIS are:

  • fine wine
  • crops
  • unlisted shares
  • timber

Specific risks of UCIS:

  • illiquidity
  • high volatility
  • unclear or high charges
  • gearing
  • no FOS or FSCS protection
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6
Q

A2A. Unregulated collective investment schemes and non-mainstream pooled invesments (pages 3 & 4)

NMPIs

A

The types of investment covered by the term NMPI is not defined but generally covers:

  • investment funds such as private equity, debt, real estate and hedge and infrastructure funds
  • also includes Qualified Investor Schemes (QIS)

The following are NOT NMPIs:

  • exchange-traded products
  • REITs
  • VCTs
  • Overseas imvestment companies that would meet ‘trust status’ if in the UK
  • securities held by special purpose vehicles (SPVs) that pool investments in listed or unlisted shares/bonds

NMPIs can be marketed only to certain professionals who understand the risks involved:

  • certified high net worth individuals (signed a certificate to show they have an income of more than £100,000 and investable assets of £250,000)
  • certified sophisticated investors (has an FCA certificate written in the last 36 months saying they are knowledgeable and sophisticated)
  • self-certified sophisticated investors (have certified themselves and meet at least one of the criteria set out in FCA rules)
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7
Q

A3. Undertaking for Collective Investment in Transferable Securities (UCITS) (page 5)

A
  • refers to a series of EU directives designed to facilitate the promotion of funds to retail investors across the EU and EEA
  • allows funds to be sold throughout the EU, so they can cross borders
  • subject to regulation by its home country regulator
  • this should reduce costs and improve customer choice
  • UCITS funds comply with all requirements created as a result of all of the directives issued no matter what EU country it is established in
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8
Q

A4. Types of collective investment scheme (pages 6 & 7)

A

Two main types:

  1. Open-ended (variable share capital)
  2. Closed-ended (fixed share capital)
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9
Q

A5. Open-ended funds (page 6)

A

These dominate the fund landscape

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10
Q

A5A. Unit trusts (UTs) (pages 6 & 7)

A

LEGAL STRUCTURE

  • created as a trust
  • trustee legal owner
  • unit holders are the beneficial owners
  • trust deed executed between the two parties, the trust manager and trustee
  • trust deed clearly states the investment objectives and limits to investment amounts

MANAGEMENT

  • unit trust manager makes buy/sell and asset choice decisions
  • can outsource management to a third party
  • trustee holds the assets for the beneficiaries
  • trustee protects their interests
  • the trustee creates new units
  • trustees are usually large institutions
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11
Q

A5A. Unit trusts (UTs) (pages 6 & 7)

CONTINUED

A

AUTHORISATION & SUPERVISION

  • UTs require authorisation by the FCA
  • supervision undertaken by the FCA and trustee

PRICING & VALUATION

  • priced on a daily basis at the ‘valuation point’
  • this valuation provides the NAV for the fund which is divided into the units to produce seperate buying and selling prices
                 NAV ------------------------------------------ = Buying & selling prices Number of units in existence
  • buying and selling prices usually dual priced so have bid-offer spread

DEALING & SETTLEMENT

  • The UT manager provides a market for buying or selling
  • Initial charge included in the price of a dual-priced fund
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12
Q

A5B. Open-ended investment companies (pages 7 & 8)

A

Introduced in the late 1990s so that the UK fund industry could compete with the EU which did not use Unit Trusts as much.

OEICs are now the main fund type in the UK.

LEGAL STRUCTURE

  • underlying legal structure is a company
  • not established under the Companies Acts like a regular company
  • meet different legislation to allow them to have a share capital that expands and contracts as needed
  • also referred to as Investment Companies with Variable Capital (ICVCs)

MANAGEMENT

  • authorised corporate director (ACD) and depository appointed when OEIC initially set up
  • ACD responsible for day-to-day running of the fund
  • role of depository is to safeguard the assets and oversee the activities of the ACD, similar to the trustee of a UT
  • the responsibilities of the ACD can be delegated to a third-party, and a seperate depository appointed
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13
Q

A5B. Open-ended investment companies (pages 7 & 8)

CONTINUED

A

AUTHORISATION & SUPERVISION

  • OEICs require authorisation by the FCA
  • supervision undertaken by the depository and FCA

PRICING & VALUATION

  • have a choice of single or dual pricing
  • usually use SINGLE pricing which involves valuing the portfolio using the mid-market price of underlying assets

DEALING & SETTLEMENT

  • the ACD provides a market for buying or selling
  • different classes of share can be created
  • Initial charge IS NOT included in the price and is charged seperately
  • additional dilution levy may be charged
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14
Q

A5C. European funds (page 8)

A

SICAV

  • is an ICVC and so similar to an OEIC
  • is a Luxembourg-based company that undertakes management of the fund
  • appoints a Luxembourg-based firm to undertake administrative functions
  • approved depository safeguards assets and undertakes regulatory oversight

FCP

  • structure based on a contract between the scheme manager and the investors
  • administered by a management company
  • assets held by a seperate custodian bank
  • FCP is not a legal entity so treated as tax transparent meaning investors can reclaim withholding tax
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15
Q

A5D. Exchange-traded funds (pages 8 & 9)

A

These are index-tracker funds.

LEGAL STRUCTURE

  • has an underlying legl structure of a company, so could be a SICAV or an OEIC
  • many structured as UCITS funds (cross-border)

MANAGEMENT
- most are set up a SICAVs, so management and asset safeguarding are seperately managed

AUTHORISATION & SUPERVISION

  • require regulatory supervision from the regulator of the country in which they are established
  • listed on a stock exchange so need authorisation
  • once listed, need to comply with the continuing obligations of listed companies

PRICING & VALUATION

  • valued daily
  • provide NAV and number of shares to a disclosure system

DEALING & SETTLEMENT

  • can be traded at any time the market is open
  • trades at prices close to the NAV
  • no intial fees and low ongoing charges
  • free of stamp duty
  • settled in CREST
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16
Q

A6. Closed-ended funds (pages 9 & 10)

A6A. Investment trusts (pages 9 & 10)

A

First appeared following the passing of the Companies Act 1862, which allowed the creation of companies with limited liability.

Usually issued on AIM as cheaper, but can be listed on the LSE too (usually the larger, older ITs).

LEGAL STRUCTURE

  • are structured like normal companies and have a board of directors and shareholders
  • have a fixed-capital base
  • when a new fund is to be created, a new trust must be set up and marketed

MANAGEMENT

  • board manages the company
  • assets are segregated to safeguard them by appointing several custodians
  • can borrow money (gearing)
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17
Q

A6A. Investment trusts (pages 9 & 10)

CONTINUED

A

AUTHORISATION & SUPERVISION

  • require approval from the UK listing authority
  • need approval from a stock exchange to be listed
  • must have a board that is seperate to that of the management company

PRICING & VALUATION

  • valued daily
  • provide NAV and number of shares to a disclosure system
  • can issued preference shares and zero-coupon bonds in addition to ordinary shares
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18
Q

A6A. Investment trusts (pages 9 & 10)

CONTINUED

A

DEALING & SETTLEMENT

  • shares bought and sold on the LSE like normal companies
  • price paid depends on supply and demand, so may pay a premium or discount to the NAV
  • buy-back schemes allow companies to buy back shares that reach a certain discount to NAV
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19
Q

A6B. Real estate investment trust (REIT) (page 10)

A

REITs pool investor’s money to invest in commercial and residential property.

Can provide investors with tax-efficient exposure to rental properties.

Provided the REIT distributes 90% of its taxable income to investors, they are exampt from CGT and corporation tax. Instead, investors pay tax on the dividends and capital growth at their own marginal rates, avoiding double taxation.

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20
Q

A6C. Other closed-ended funds (page 11)

A

Can be set up to have longer investment periods and be beneficial in that during an economic downturn, investors can’t pull out

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21
Q

A6D. Offshore companies (page 11)

A

IT;s can be set up offshore (Channel Islands) to gain a small advantage and many new ITs have been set up offshore.

UK ITs have been made more attractive in response to this.

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22
Q

A7. Taxation (pages 11 & 12)

A

The tax treatment of an investment is determined by:

  • the domicle of the investment

or

  • the country in which it is incorporated
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23
Q

A7A. Onshore funds (page 12)

A

Tax within the Fund (non-investor tax):

  • OEIC income recived subject to corporation tax at 20%
  • IT income subject to the main corporation tax rate
  • dividends are not subject to tax
  • authorised funds are CGT exempt

Investor taxation:
- CGT taxed at 10% or 20%

  • Dividend allowance of £2,000
  • – then BR @ 7.5%, HR @ 32.5% and AR @ 38.1%
  • Bond distributions taxed the same as savings:
  • – BR PSA of £1,000 and HR PSA of £500
  • – BR then taxed @ 20%, HR @ 40%, AR @ 45%
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24
Q

A7A. Offshore funds (pages 12 & 13)

A

REPORTING FUNDS

  • does not have to distribute all of its income
  • but must report what it does distribute, to HMRC
  • dividends paid gross and taxable
  • CGT subject to normal rules
  • where the fund holds more than 60% of its assets in interest-bearing securities, any distribution is treated as payment of interest in the hands of a UK investor

NON-REPORTING FUNDS

  • roll-up funds, so all income accumulated and no dividends paid
  • gain subject to income tax at the marginal rate
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25
Q

A8. Charges (pages 13 & 14)

A

Possible charge types:

  • Initial Charge (zero for most funds)
  • Annual Management Charge
  • Performance Fees
  • Exit Charges

ETF Charges:

  • Broker’s Commission (charges when buys/sells made)
  • Stamp Duty (on purchases of IT shares)
  • Annual Fees (up to 0.75% p.a.)

Managers can charge additional fees:

  • Broker’s Commission
  • Legal & Audit Fees
  • Fees for specialist tax advice
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26
Q

A8. Charges (pages 13 & 14)

CONTINUED

A

UCITS are required to publish an OCF in a KIID Document. The OCF includes:

  • all costs incurred by the UCITS fund
  • costs for outsourced services
  • registration fees
  • regulatory fees
  • audit fees
  • payments to legal and professional advisers

KIID does not include:

  • initial fees
  • exit fees
  • performance charges
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27
Q

A9. Measurement of fund charges (page 14)

A

AMC:

  • does not entry or exit charges
  • only relates to the management of the fund
  • does not cover regulatory fees etc

OCF:

  • does not include entry or exit fees
  • does not include performance fees

TER:

  • includes the AMC plus regulatory fees (like an OCF)
  • includes performance fees
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28
Q

B. Fund categories (pages 16, 17 & 18)

A

Main fund classifications:

  1. ABI (life and pension funds)
  2. IA (UK investment funds)
  3. European Fund and Asset Management Association (EFAMA) - Europe-wide funds

Main classes:

  • Cash
  • Bonds
  • Equities
  • Property
  • Multi-manager funds
  • Multi-asset funds
  • hedge funds
  • absolute return funds

General principle is that the fund holds at least 80% of its holdings in that sector.

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29
Q

C. Fund types (page 17)

C1. Money market funds (pages 17 & 18)

A

The ESMA issued guidelines for money market funds and set out a two-tier approach:

  1. Short-term money market funds
  2. Money market funds

The distinction recognised the credit risks inherent with the underlying portfolio.

The IA also introduced two sectors to match the above:

  1. Short term money market funds must maintain a constant NAV
  2. Money market funds should have a fluctuating NAV and must only invest in approved money market instruments and deposits with credit institutions

Both must invest in highly-rates securities, but the timescales very:

  1. STMM: weighted life of no more than 120 days
  2. MM: longer weighted life of up to 12 months
30
Q

C1A. Uses of money market funds (page 18)

A
  • short term home for cash balances
  • alternative to bonds and equities
  • part of an asset allocation strategy
31
Q

C1B. Assessing money market funds (page 18)

A

To assess whether suitable we should consider:

  • compare relative rates of return
  • charges incurred affect rates of return
  • speed of access to the funds
  • underlying assets
  • creditworthiness of underlying assets
  • experience of fund management team
32
Q

C2. Bond funds (pages 19 & 20)

A

MAIN ADVANTAGES OF BONDS

  • for fixed-interest bonds, a regular income
  • for most bonds, a fixed maturity date
  • range of yields to suit different investors

MAIN DISADVANTAGES

  • inflation can erode income in real terms
  • fluctuating value of bonds in line with market interest rate changes
  • default risk
33
Q

C2A. Types of bond fund (page 19)

A

IA has split bonds into seven sectors.

One of those is a Bond ETF.

34
Q

C2B. Advantages and disadvantages of bond funds (pages 19 & 20)

A

Exposure to bonds can be achieved by investing in a Bond OEIC/UT:

ADVANTAGES:

DIVERSIFICATION
- bond funds hold a wide range of bonds with varying maturities

PROFESSIONAL MANAGEMENT
- access to this is possible via bond OEICs and UTs

LIQUIDITY
- daily trading allows holdings to be bought and sold

INCOME
- most bond funds pay regular distributions

35
Q

C2B. Advantages and disadvantages of bond funds (pages 19 & 20)

CONTINUED

A

DISADVANTAGES:

  • an OEIC investing in bonds does not have a specific maturity date like an actual bond
  • the income may vary because of the change in underlying securities
  • still exposed to credit, inflation and default risk
  • there is a cost to having the fund managed which on average is 1% per annum
36
Q

C2C. Assessing bond funds (pages 20 & 21)

A

Key factors in selecting a bond fund:

  1. INVESTMENT OBJECTIVES
  2. AVERAGE MATURITY
  3. DURATION
  4. CREDIT QUALITY
  5. PERFORMANCE
  6. FEES & CHARGES
  7. FUND MANAGERS
37
Q

C3. Equity funds (page 21)

A

Represent that majority of UTs and OEICs available

38
Q

C3A. Types of equity funds (page 21)

A

IA has 14 sub classes for equities.

39
Q

C3B. Advantages and disadvantages of equity funds (page 21)

A

ADVANTAGES

  • risk is spread and reduced (diversification)
  • access to professional management
  • cost efficiency
  • access to normal unaccessible markets
  • close regulation / investor protection

DISADVANTAGES

  • volatile investment performance
  • cost to investing
  • performance can be lacklustre
40
Q

C3C. Assessing equity funds (pages 21 & 22)

A

Important to pick from what is available, looking at different regions globally and then picking different company size and location or industry.

41
Q

C4. Property funds (page 22)

A

Number of ways in which you can invest in property:

  • direct property purchase
  • REITs or listed property companies
  • Property UT/OEICs
42
Q

C4A. Types of property fund (pages 22 & 23)

A

Property funds are usually classified as follows:

  • Core Funds (lower risk, aim to provide smaller returns)
  • Core-Plus Funds (active, more risk, gearing)
  • Opportunistic Funds (closed ended)
43
Q

C4B. Advantages and disadvantages of property funds (page 23)

A

ADVANTAGES

  • attractive absolute returns over recent years
  • potential for high income from rental yields
  • some inflation protection
  • portfolio diversification
  • low correlation with bonds and equities

DISADVANTAGES

  • lack of liquidity
  • volatility
  • costs involved can be high
44
Q

C4C. Assessing property funds (pages 23 & 24)

A

Factors to consider when investing in property:

  • asset price bubbles
  • liquidity of listed companies verses OEICs
  • levels of gearing
  • redemption charges and notice periods
45
Q

C5. Hedge funds (page 24)

A
  • Mostly offshore tax havens
  • Largely unregulated
  • Higher levels of risk than traditional assets
  • Potential more higher returns as a result
  • Make use of gearing
  • May be a single fund, or a fund of hedge funds
46
Q

C6. Absolute return funds (pages 24 & 25)

A
  • aim to offer a positive return regardless of market conditions
  • some use short/long positions to benefit in market falls and rises (tricky to manage, need skill)
  • some use macro strategies driven by top-down economic analysis
  • some charge a performance fee of 15% - 20%
47
Q

C7. Multi-asset funds (page 25)

A
  • take the multi-manager concept but add a greater range of funds to it, such a commodities or forestry
  • greater diversification as a result of investing in a wider range of assets
48
Q

D. Active fund management styles (pages 26, 27, 28, 29 & 30)

A

The chosen investment style is likely to have a large impact on performance.

49
Q

D1. Top-down investment management (page 26)

A

Involves three stages:

  1. Asset allocation
  2. Sector selection
  3. Stock selection
50
Q

D1A. Asset allocation (page 26)

A
  • prospects for each of the main assets classes considered
  • usually against the backdrop of the world’s economic, political and social environment
  • a committe (which meets monthly) draws upon forecasts for risk and return for each asset class and correlations between these returns
  • most asset allocation decision are either over or under-weight compared to the peer-group median
  • decision must also be made whether to hedge market and/or currency risks
51
Q

D1B. Sector selection (page 26)

A
  • sector selection strongly influenced by economic factors , notibly where in the economic cycle the economy is currently positioned
52
Q

D1C. Stock selection (page 27)

A
  • a combination of fundamental and technical analysis is used to work out which stocks to pick within the chosen sectors
  • manager must accept an element of ‘tracking error’ which is where the weighting of the fund differs to that of the chosen benchmark
  • the higher the tracking error (or ‘active risk’) the greater the chance of over or under performance
53
Q

D2. Bottom-up investment management (pages 27, 28, 29 & 30)

A
  • looks at the unieque attractiveness of individual stocks

- the world economy and markets are second to the actual stocks themselves

54
Q

D2A. Value investing (pages 27 & 28)

A
  • seeks to identifiy stocks that are trading at less than their instrinsic value
  • manager seek undervalued stocks

Benjamin Graham identified tests widely used in value investing:

  1. ADEQUATE SIZE (setting a minimum size)
  2. STRONG FINANCIAL CONDITION (ratio of 2)
  3. EARNINGS STABILITY (no loss in last 10 years)
  4. DIVIDEND RECORD (20 year dividend record)
  5. EARNINGS GROWTH (keep pace with inflation)
  6. MODERATE P/E RATIO (price less than 15x earnings)
  7. MODERATE RATIO OF PRICE TO ASSETS
55
Q

D2B. Growth investing (page 28)

A
  • identifiying companies that have the potential for above-average growth
  • higher risk than value investing

Jim Slater said that to be considered a growth company it must exhibit the following

  1. Positive growth rate in EPS in four or five years
  2. Low P/E ratio relevant to the growth rate
  3. Optimistic chairperson’s statement on accounts
  4. Strong liquidity, low borrowings, high cash flow
  5. Competetive advantage
56
Q

D2C. Blend funds (pages 28 & 29)

A
  • investing in companies that show growth, value and growth and value characteristics
  • growth stocks may provide the potential for returns that exceed the overall returns of the market, but can be more volatile
  • value stocks may outpace returns of other equity investments and may be less volatile
  • manager can pick and choose, changing style at will
57
Q

D2D. Income investing (page 29)

A
  • aims to identify companies that deliver a strong stream of income
  • to find companies that provide sustainable dividends
  • equity income funds (income investing) are usually value stocks because of higher dividends over low capital value. Out of favour stocks paying higher dividends
58
Q

D2E. Momentum investing (page 29)

A
  • buying in-favour stocks
  • buying stocks that have had high returns over the past three to twelve months and selling those that have poor performance over the same period
  • ride trends to make a profit
  • taking a long position
  • ignores asset allocation
59
Q

D2F. Contrarian investing (page 29)

A
  • going against the trend
  • opposite to momentum investing
  • believe that whatever the majority is doing is wrong
  • use fundamental analysis like value investors do to find under-performing stock, but are more judgemental
60
Q

D2G. Ethical and socially responsible investing (pages 29 & 30)

A
  • selects companies for inclusion in a fund based on their social, environmental and ethical principles
  • traditional ethical investing avoids those areas that are considered to have adverse effects
  • managers screen against negative criteria
  • usually results in more smaller companies being used
  • benchmarked against something like FTSE4Good
61
Q

D2G. Ethical and socially responsible investing (pages 29 & 30)

CONTINUED

A

SUSTAINABILITY FUNDS

  • these focus on sustainable development
  • concentrate on companies that tackle environmental issues head-on
  • are flexible in selecting investments

They use two methods of stocks selection:

  1. POSITIVE SECTOR SECTION
    - choose companies that are likely to benefit from the global shift to more sustainable forms of activity, such as renewable energy sources
  2. BEST OF SECTOR
    - choose companies for the environmental leadership they demonstrate in the sector, regardless of whether they fail the negative criteria applied by ethical investment funds (e.g. an oil company focussing more on renewable energy)
62
Q

E. Passive investment management (pages 30, 31, 32 & 33)

A
  • often referred to as ‘indexing’ because it entails investing in exactly the same securities and proportions as an index
  • this method of management is based on the belief that it is impossible to beat the average on a risk-adjusted basis
63
Q

E1. Index funds (page 31)

A
  • these are collective investment schemes
  • that track the performance of an index
  • can be structures as an OEIC, UT or ETF

ADVANTAGES

  • easy to understand investment objectives
  • returns in line with an index
  • low costs
  • lower portfolio turnover
  • no exposure to active management

DISADVANTAGES

  • possible tracking error
  • follow the market up and down
64
Q

E2. Indexation methodologies (page 31)

E2A. Physical replication (page 31)

A

Traditional indexed portfolios employ one of three established tracking methods of Physical Replication:

  1. FULL REPLICATION (replicated the index in full)
    - expensive
    - better for large portfolios
  2. STRATIFIED SAMPLING (requires a representative sample of securities from each sector of the index to be held)
    - less expensive
    - can be biased towards stocks with best perceived prospects
  3. OPTIMISATION (uses computer modelling to find a representative sample of the index)
    - less expensive
    - more complex
65
Q

E2B. Synthetic replication (pages 31 & 32)

A
  • involves the fund manager entering into a swap (an OTC derivative)
  • with a market counterparty
  • to exchange the returns on the index
  • for a payment

This approach passes the tracking error and rebalancing risk to the counterparty, whilst the ETF generates exactly the performance of the index.

Generally a lower cost method with OCFs of 0.15% - 0.85%.

66
Q

E3. Tracking error (pages 32 & 33)

A
  • the difference between the portfolio’s return and the return of the benchmarked index
  • sometimes seen as the standard deviation of the difference between the portfolio and benchmark

Passive funds mirror the index returns and therefore minimise tracking error.

Low tracking error: portfolio closely following index
High tracking error: opposite of the above

67
Q

E3. Tracking error (pages 32 & 33)

CONTINUED

A

Tracking error may occur because:

  • poor optimisation/replication (holding fewer stocks than are in the index to lower costs)
  • timing of cash dividend payments
  • some indices are more difficult to track than others
  • index funds that track less liquid markets tend to diverge because of the difficulty in trading the stocks
  • index fund may have limits on how much of a certain stock it can hold and not replicate because of this
68
Q

E4. Evaluating index funds (page 33)

A

Factors to consider when evaluating ETFs:

  1. UNDERLYING INDEX
  2. STRUCTURE
    - whether physical or synthetic replication used
    - level of tracking error
  3. TAX
    - domicile of fund
  4. COSTS
  5. DEALING
    - level of liquidity
69
Q

F. Fund selection (pages 33 & 34)

A

Main criteria used in fund selection:

  1. Fund objective
  2. Cost and charges
  3. Strength of the management group
  4. Skill on the manager
  5. Type and structure of the fund
  6. Past and potential future performance
  • checking fund ratings is important
  • some rating agencies provide tools to compare funds
  • the comparison is using risk-adjusted performance
  • need to check the rating agencies report too

Large funds can spread costs over a wide base which can be beneficial for passibe funds, especially those that employ full replication.

70
Q

G. Market developments (page 35)

A

OEICs can have issued in respect a lack of liquidity, such as the property crisis and LF Woodford Fund.

Large scale redemptions could lead to more illiquid assets having to be sold that may exceed the ability of investors to absorb them.

71
Q

Chapter 7 Key Points (pages 36 & 37)

A

INVESTMENT FUNDS

  • authorised funds can be marketed to retail investors
  • however, UCIS are unregulated and carry greater risk
  • UCITS funds (European authorised funds) can be freely marketed across the EU
  • OEIC was introduced to compete in Europe
  • UT initial charge built in
  • OEIC initial charge seperate
  • some OEICs have to suspend dealing in periods of high redemptions

FUND CATEGORIES
- Three main classifications: ABI, IA and EFAMA

ACTIVE FUNDS

  • Short-term MM funds have a CONSTANT NAV
  • MM funds have a fluctuating NAV

ACTIVE FUND MANAGEMENT STYLES
- Top down (considers asset classes first)

PASSIVE INVESTMENT MANAGEMENT
- based on the belief that it is impossible to consistently beat the average on a risk-adjusted basis

FUND SELECTION
- Funs fact-sheets show a variety of industry-standard measures that provide details of a fund’s volatility as well as the risk against a given benchmark

MARKET DEVELOPMENTS

  • Property funds and other funds investing in illiquid assets are a concern for regulators
  • Changes to how liquidity is assessed and redemption periods are in progress

J10 - Discretionary Investment Management (15 decks)

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