Alternative Investments

Question 1

5 points

Features of commodity investment

Answer 1

• No income, capital growth only
• Risks involved - liquidity risk, special market
• Access through
• ETC
• Funds
• Direct investment is rare

Question 2

4 points

What are ETCs

Answer 2

• Investment vehicles that track the performance of an underlying
  commodity index
• Similar to ETFs and traded and settled exactly like normal shares on
  their own dedicated sector
• Open ended securities and come in two forms
• Created and redeemed on deman by issuer

Question 3

4 points

Tax features of ETCs

Answer 3

• Can be traded within SIPPs and ISAs
• CGT on growth
• Can use dividend allowance
• No stamp duty

Question 4

5 points

Benefits of Commodities and precious metals

Answer 4

• Provides diversification in assets in portfolio of assets
• Can be liquid to a certain degree, open ended, shares can be
  created on demand
• Low tracking error - open ended nature ensure tracking error is
  minimised
• Ability to go long or short based on bull or bear market
• Market Access, all type of investors can gain exposure same fees as everyone
• Transparency, no hidden fees and accurate pricing

Question 5

Gold bar - drawbacks

Answer 5

• Very illiquid and hard to sell
• Insurance cost to protect and store
  *

Question 6

7 points

Gold bar - positives

Answer 6

• Diversification as part of other assets, under alternatives
• Hedge against inflation
• Hedge against political instablilty and economic uncertainty
• Tangible asset
• Balances the portfolio
• Negative correlation to equities and bonds
• Reduces volatility and overall portfolio risk

Question 7

7 points workshop Q

Explain to Tom and Sally why commodities fund might be suitable long term holding for some of their investments

Answer 7

• It can be part of a diversified asset allocation
• and still match their medium ATR
• Commodities negatively correlate with other asset classes
• They can be held in ETC which are not subject to stamp duty
• It allows Tom and Sally to utilise their 2 x £3,000 CGT exemptions
• Any losses can be carried forward
• Potential for capital growth
• Dividend allowance of £500 can be used for dividend income
• Inflation hedge
• Tom and Sally can tolerate the volatility as they have medium to high CFL