CH 11: Other investment classes Flashcards

1
Q

Collective investment schemes (CIS)

2

A
  • Provide structures for the management of investments on a grouped basis.
  • Provide an opportunity for investors to achieve a wide spread of investments and therefore to lower portfolio risk.
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2
Q

Types of CIS

2,2

A

Closed ended schemes:
* Once the initial tranche of money has been invested, the fund is closed to new money.
* Only way of investment is to purchase shares from sellers. eg investment trusts

Open ended schemes:
* Managers create/cancel units as new money is invested/disinvested
* eg Unit- trusts

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3
Q

Regulation aspects of CISs

4

A
  • Categories of assets held eg bonds,equities,property etc
  • Whether unquoted assets
  • Maximum level of gearing
  • Any tax reliefs available
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4
Q

Investment Trust Companies

4

A
  • Public companies that manage shares and other investments
  • Able to raise/borrow capital through debt/equity
  • Close ended, price of shares determined by supply and demand
  • NAV used to determine trades at premium or discount

Public company therfore shareholders,board,investment managers etc.

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5
Q

Unit Trusts

5

A
  • Open ended investment vehicle
  • Buy units priced at NAV= assets/#units (bid/offer value of assets? charges taken from units?
  • Limited borrowing power
  • Management company: setup trust and invest funds.
  • Trustees: ensure management obeys trust deed and price units
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6
Q

Open ended Investment Company

3

A
  • Structure of a company with the open end of a unit trust
  • Manager create shares when new money is invested and redeem shares when shareholders disinvest
  • Single price added as initial charge for purchase no bid/offer
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7
Q

Differences between Closed and Open ended CIS’

2,2,4

A

Marketability:
* Shares CE less than under actual asset
* Units OE are guaranteed by managers

Gearing:
* CE can make share price more volatile than under asset. (higher return req via gearing)
* OE cannot be geared limited borrowing power

CE
* Buy assets @ discount to NAV on CE, OE unit price set directly using NAV no discount
* CE provides higher return due to higher volatility
* CE invest in wider range of assets
* Uncertainty in NAV of CE(unlisted assets)

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8
Q

Reasons for discounted NAV in ITC’s

A
  • Management charges
  • Concerns over marketability
  • Concerns over the quality of management
  • Market sentiment/fashion (out of fashion by investors)
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9
Q

CIS’ vs Direct Investment

6,3

A

Advantages:
* Specialist experience
* Diversification access larger amount of investments
* Avoid direct management costs
* Divisible holdings
* Tax advantages
* Index tracked returns

Disadvantages:
* Lose control of selected investments
* Management charges incurred
* Tax disadvantages

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10
Q

Derivative

2

A
  • A financial instrument whose value is dependent on the value of another underlying asset.
  • Used to control risk by hedge or speculation
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11
Q

Forward contract

4

A
  • A contract to buy (or sell) an asset on an agreed basis
    in the future.
  • Non-standardised so can be tailor made
  • Can be traded Over-the-counter (no quoted price)
  • Credit risk dependent on the creditworthiness of the counterparty.
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12
Q

Futures contract

5

A
  • STANDARDISED contract, to buy (or sell) an asset on an agreed basis in the future.
  • Exchange traded: sets terms of contract (excl price) and creates market
  • Liquid market due to a high amount of identical futures
  • Clearing house removes default risk by acting as counter party to every transaction.
  • Initial margin paid by both parties then variation margin along duration.

More liquid than forwards

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13
Q

Options

5

A
  • Gives the holder the right - but not the obligation - to buy/sell a specified asset on a specified future date.
  • Call: right to buy ST>K
  • Put: right to sell ST<K
  • Can be exchange traded or OTC
  • European vs American
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14
Q

Warrant

4

A
  • Option issued by a company over its own shares. (short call)
  • The holder has the right to purchase shares at a specified price at specified times in the future.
  • No rights to share until maturity, protection from price changes
  • Bond warrants do exist as well
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15
Q

Outline the main uses of derivatives

3,1

A
  1. Providing protection against the risk of adverse market movements:using futures contacts to set the price of assets in advance
  2. Aiming to achieve higher returns / profits through speculation
  3. Allowing financial institutions to alter the structures of their portfolios without needing to trade in the underlying assets

Closing out a contract:
* By taking out an equal but opposite contract. Only receive profit/loss
E.g. buy a 3-month future (the price of X will be paid) and 3 months later, just before delivery, sells identical future at price Y. Therefore the profit or loss is Y-X.

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16
Q

Main reasons to hold foreign assets

3

A
  • Match liabilities in the foreign currency
  • To increase expected returns: by taking highe risks/inefficiencies
  • Reduce risk by increasing the level of diversification. By country,economy,market,currency, industry
17
Q

Drawbacks of Overseas Markets

3

A
  • Mismatch of domestic liabilities
  • Tax (withholding tax and possible double taxation)
  • The volatility of the currency (currency risk)

MTV

18
Q

PRACTICAL drawbacks of overseas investment

A
Custodian needed
Additional admin required
Time delays
Expenses incurred / expertise needed
Regulation poor
Political instability
Information harder to obtain (and less of it)
Language difficulties
Liquidity problems
Accounting differences
Restrictions on foreign ownership / repatriation problems

CATERPILLAR

19
Q

Indirect overseas investments include investments in:

3

A
  • MULTINATIONAL companies based in the home market
    +: Expertise in foreign mkt / -: No choice over investment
  • DERIVATIVES based on overseas assets
  • COLLECTIVE INVESTMENT SCHEMES specialising in overseas investment
20
Q

Attractions of investments in emerging markets

5

A
  • Current market valuation
  • inefficient markets
  • perceived to be risky
  • Rapid economic growth
  • Better diversification
21
Q

Drawbacks of investment in emerging markets

6

A
  • Volatility
  • Marketability
  • Political stability
  • Regulation of the stock market
    • insider trading by local investors
    • fraud
  • Restrictions on foreign investment
  • Communication problems and availability and quality of information