C16 - Investment Products (25-30 Qs C15-C17) NC Flashcards
Authorised Unit Trusts (AUT) are:
A) Trusts
B) Partnerships
C) Unlimited Companies
D) Limited Companies
A - Trusts
- Structure: AUTs are structured as trusts, with trustees who own the investments and investors who own units in the fund.
- Management: An investment manager manages the fund’s assets.
- Units: Investors buy and sell units in the fund, and the price of the units reflects the value of the fund’s assets.
- Trust deed: The trust deed establishes the AUT and outlines the fund’s category, name, and investments.
- Beneficial interest: Investors have a beneficial interest in the trust’s property, represented by their units.
- Taxation: AUTs are a type of authorized investment fund (AIF), which are taxed in the same way.
Index Funds can suffer from:
1. Tracking error
2. Duration error
3. Market risk error
4. Dedicated error
A) 1 only
B) 1, 2 and 4 but NOT 3
C) 3 and 4
D) 1, 2 and 3 but NOT 4
A - Tracking error
Tracking error is the standard deviation of the surplis between the portfolio and the market (index return)
- Tracking error is a measure of how closely an investment portfolio matches the performance of a benchmark index. It’s also known as active risk.
- Duration RISK refers to a bond or bond portfolio’s sensitivity to interest rate changes, accounting for characteristics such as yield, coupon rate and maturity. Bond prices move inversely to changes in interest rates, so that if interest rates rise (or fall), bond prices fall (or rise).
- Market risk is the possibility of an investor experiencing losses due to factors that affect the overall performance of the financial markets.
Approved investment trust companies:
1. Are open-ended
2. May have a rights issue
3. May borrow
A) All of the above
B) 1 and 2 only
C) 1 and 3 only
D) 2 and 3 only
D - 2 (a rights issue) and 3 (may borrow)
Both investment trusts and funds are what’s known as ‘collective investments’. This means investors pool their money to create a larger sum that is then invested by an asset manager, who makes the decision on which companies to buy, which sectors to invest in, and which geographies investors should be exposed to.
The fundamental difference between investment trusts and funds is how they are structured. You may hear of investment trusts referred to as ‘closed-ended funds’ or even an ‘Investment Company’, and funds being referred to as ‘open-ended investment companies’ (OEIC), or Investment Companies with Variable Capital (ICVC). Confusingly, funds can also be known as unit trusts.
When you invest in an open-ended fund, new units in the fund are created meaning it gets bigger each time a new investor invests. The flip-side of this is that when an investor takes their money out of the fund, it shrinks in size as the units that person owned are cancelled.
Investment trusts work in a different way because they are listed companies with a fixed number of shares in issue. This means if you want to buy a share in an investment trust you have to find someone willing to sell the shares they own, without changing the overall size of the investment trust.
Which of the following are associated with investment trusts?
1. Closed-ended
2. May borrow money for generating purposes
3. If an investor sells a share, the net asset value (NAV) of the portfolio of the fund is affected
4. They are approved by the Treasury
A) 1 only
B) 2 only
C) 1 and 2 only
D) All of the above
C - 1 (closed-ended) and 2 (can borrow money)
An investment trust may borrow up to 15% of the fund. Shares in an investment trust are sold in the secondary market - as such the NAV will NOT be affected. Investment trusts are companies that are approved by HMRC to be treated as investment trusts under the Corporation Tax Act 2010. HMRC approval exempts investment trusts from Corporation Tax on capital gains. This exemption prevents double taxation for shareholders, who would otherwise be taxed on their income and capital gains.
In what type of pension fund does the sponsor agree to pay members of the scheme a predetermined percentage of salary, subject to the contributor’s years of service?
A) Defined benefit
B) Defined contribution
C) Personal pension
D) SIPP (self-invested personal pension)
A - Defined benefit
A defined benefit (DB) pension is a type of pension plan that guarantees a specific income for life after retirement. The amount paid out is based on the employee’s salary history and years of service. DB pensions are also known as final salary pensions.
A fund which buys investments with contributions, where the return on these investments defines the pension benefits care called?
A) Personal pension
B) Defined benefit
C) Defined contribution
D) Occupational pension scheme
C - Defined contributions
A defined benefit pension is a workplace pension that pays out a set amount in retirement, while a defined contribution pension is a retirement account where you invest money.
Tracker funds tend to:
A) Outperform the benchmark
B) Have higher transaction costs than actively managed funds
C) Have higher asset turnover than actively managed funds
D) Have lower transactional costs than actively managed funds
D - Have lower transactional costs than actively managed funds
Tracker funds can either be exchange-traded funds (ETFs), unit trusts or open-ended investment companies (OEIC funds). Instead of having a manager who tries to pick investments to beat the markets, tracker funds – also known as passive or index funds – simply follow the overall performance of a particular market or index, such as the FTSE 100.
Which of the following investment funds might have a split-capital structure?
A) Unit Trust
B) Pension plan
C) Investment Trust
D) Life Assurance Policy
C - Investment Trust
Investment trusts often issue TWO classes of share: one class for income and one class for growth i.e. split capital.
- Share classes: Splits issue different classes of shares, such as income shares and capital shares.
- Income shares: These shares pay dividends but don’t offer capital appreciation.
- Capital shares: These shares offer the potential for capital gains but don’t pay income.
- Share prices: The price of a split’s shares can be affected by high cross holdings and high gearings.
- Life: Most splits have a limited life, known as the wind-up date, which is usually five to ten years.
Which of the following is NOT generally an attribute of index funds:
A) Smaller number of securities than the index
B) Relatively low management changes
C) Relatively low transaction errors
D) Relatively higher tracking errors
D - Relatively higher tracking errors
Tracking error measures the deviation from the benchmark: an index fund has a near-zero tracking error, while an actively managed portfolio would normally have a higher tracking error. Thus the tracking error does not include any risk (return) that is merely a function of the market’s movement.
Aa fund manager who holds all the constituents of a particular index but NOT in proportion to their market values has created a:
A) Maximum fund
B) Minimum fund
C) Untilted funds
D) Tilted Fund
D - Tilted Fund
A tilt fund is a type of mutual fund or exchange-traded fund that includes a core holding of stocks that mimic a benchmark type index, to which additional securities are added to help tilt the fund toward outperforming the market.
Key Takeaways
* Tilted funds are benchmarked against common index funds and then enhanced with additional securities that “lean” towards a certain investment strategy, in an effort to outperform the baseline fund.
* Various tilted funds place their investments in additional securities on factors such as P/E ratios, amount of dividends paid, or specific categories of stocks in order to improve financial performance.
Tilt funds are also sometimes called enhanced index funds since they are essentially index funds with more options. These funds are typically used by major investors in an effort to improve overall investment returns. Tilt funds can be benchmarked against any index in the world, but American fund managers typically use the Standard & Poor’s 500 Index (S&P 500) or another broad-based index as the benchmark against which the performance of a tilt fund is measured, giving them the ability to keep pace with the general direction of the overall market.
Fund managers use tilt funds to obtain accelerated returns from their investments while maintaining a certain level of safety by sticking with large, mainstream stocks and not diverging too far from an index. Therefore, while tilt funds have the potential to outperform the broader market, the risk they take on to achieve superior returns is considered to be relatively low. Because of their strategy of less-risky investment, tilt funds have historically been popular with pension funds. The right mix, or tilt, of stocks, provides both safety and performance by combining elements of active and passive index fund styles.
Investing in an index fund is an example of:
A) Passive portfolio managment
B) Active portfolio management
C) Diversification
D) Hedging
A - Passive Portfolio Management
Index funds—passively managed funds do not attempt to outperform a designated index. Rather, they simply seek to mirror the performance of an index by holding the same or similar securities in the same proportions. The managers only buy or sell securities as necessary to correspond with the index.
Investment trusts are normally:
A) Trusts
B) Partnerships
C) Unlimited Companies
D) Limited Companies
D - Limited Companies
An investment trust is a public limited company (PLC) traded on the London Stock Exchange, so investors buy and sell from the market.
Authorised Unit Trusts (AUTs) are:
1. Open-ended funds
2. Legally constituted trusts
3. Regulated by the FCA
A) 1 and 3 only
B) 1 and 2 only
C) 2 and 3 only
D) All of the above
D - All of the above: 1 (Open-ended), 2 (legally consituted) and 3 (FCA Regulated
An AUT is a type of investment fund that is regulated by the FCA. AUTs are a type of collective investment fund, which means they allow multiple investors to pool their money into a professionally managed portfolio.
How AUTs work:
* Structure: AUTs are trusts, with trustees who own the investments and a fund manager who manages them.
* Units: Investors buy and sell units in the fund, which represent a beneficial interest in the trust’s assets.
* Price: The price of units moves in line with the value of the fund’s assets.
Taxation
* AUTs are taxed in the same way as other authorised investment funds (AIFs).
* The trustees of an AUT are treated as a UK company for tax purposes.
* Investors in AUTs are taxed on capital gains.
Benefits
* AUTs allow investors to access professionally managed portfolios.
* AUTs can be a way to diversify your portfolio.
Which of the following is NOT a feature of Exchange Traded Funds?
A) ETFs are open ended
B) ETFs follow the perforance of an index closeley
C) ETFs use forward pricing
D) ETFs are NOT subject to stamp duty
C - ETFs use forward pricing
ETFs use real-time pricing
An exchange-traded fund is an investment vehicle that pools a group of securities into a fund. As its name indicates, it can be traded like an individual stock on an exchange.
An exchange-traded fund (ETF) is an investment fund that holds multiple underlying assets and can be bought and sold on an exchange, much like an individual stock. ETFs can be structured to track anything from the price of a commodity to a large and diverse collection of stocks.
ETFs can even be designed to track specific investment strategies. Various types of ETFs are available to investors for income generation, speculation, or hedging risk in an investor’s portfolio. The first ETF in the U.S. was the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index.
Which of the following is TRUE of a passive fund management strategy?
A) Tracking a benchmark, BEFORE having determined the acceptable level of risk
B) Tracking a benchmark, AFTER having determined the acceptable level of risk
C) Underperforming against the benchmark
D) Overperforming against the benchmark
B - Tracking a benchmark, AFTER having determined the acceptable level of risk
Which of the following is NOT a non-geared packaged product?
A) Life assurance policy
B) Personal pension
C) Share in an investment trust
D) Units in an Authorised Unit Trust (AUT) scheme
C - Share in an investment trust
A packaged product is a regulated investment, such as a life policy, a unit in a collective investment scheme, or a pension scheme.
Packaged retail investment and insurance-based products (PRIIPs) are offered by financial institutions and include stocks, bonds, insurance policies, and structured funds.
Which of the following is NOT a feature of an ICVC (Investment Company with Variable Capital)?
A) An ICVC is constituted by an instrument of incorporation, drawn up by its directors
B) At least ONE director must be an authorised corporate director or ACD
C) A depositary is required which is responsible for the saeftkeeping of the scheme property
D) An ICVC is authorised by by the Stock Exchange CIS (Collective Investment Scheme) division
**D - An ICVC is authorised by by the Stock Exchange CIS division **
An ICVC is actually authorised by the FCA under an authorisation order
Similar to an OEIC, an ICVC is a fund which, unlike a unit trust, is legally structured as a company. The manager creates and redeems shares when investments and redemptions are made by investors.
