Ch 7 Flashcards
1
Q
What does the pooling of resources allow in a Collective Investment scheme?
A
Scheme to invest in a wide spread of investments at a lower cost than could have been achieved by individuals acting on their own
2
Q
What are the benefits of Collective Investment Schemes?
A
- Cash can be pooled to create larger fund
- Professional fund managers make informed decisions
- Investor can achieve balanced portfolio because the managers can invest in spread of investments
- Ability to pursue particular objectives ie income or growth
- Investors risk is reduced by the wide spread of investments
3
Q
Who are the assets in a unit trust held by?
A
Trusteed
4
Q
who are the assets in an OEIC held by?
A
Independent depository
5
Q
What is sold to investors in an OEIC/unit trust?
A
Units or shares, representing small fraction of a portfolio
6
Q
Are unit trusts/OEICs open ended or closed ended?
A
Open ended; units/shares can be created or issued
7
Q
In unit trust/OEICs what does the unit/share price have a direct relationship with?
A
Value of underlying investments
8
Q
Who regulates the sale and marketing of OEICs/unit trusts?
A
FCA
9
Q
Name some IA categories of funds
A
- Capital protection
- Income
- Growth
- Specialist funds
- Those targeting an outcome
10
Q
What is the minimum amount of investments in a fund which must be relevant to the sector, in order to be categorised by the Investment Association? (ie growth)
A
80%
11
Q
To qualify as an income fund, what is the minimum yield of the relevant index that must be achieved?
A
90%
12
Q
What is an index-tracking fund?
A
Aims to track the performance of an index as closely as possible, but does not aim to outperform it
13
Q
What is the difference between positive screening and negative screening of ethical funds?
A
Positive screening are consciously selecting companies in environmentally friendly industries
Negative screening is not choosing funds for eg no arms companies
14
Q
What is the investment risk of a Gilt fund?
A
Relatively secure because of government backing and because gilts are not generally volatile, although they do respond in times of changing interest rates
15
Q
What sets out the rules for establishing and operating authorised schemes in the UK, which sets out minimum standards for the investments held?
A
FCA Sourcebook: COLL
16
Q
What must the trust deed of a scheme contain?
A
A statement that the fund may invest in any securities/derivatives market that is eligible under FCA regulations, no other investment limits need to be contained
17
Q
Where must detailed limits of a scheme be set out?
A
Scheme particulars/prospectus
18
Q
Who monitors the investment limits in a scheme?
A
Trustee (unit trust) or depository (OEIC)
19
Q
The general limits of an individual fund may be laid out where?
A
Trust deed (unit trust) Instrument of incorporation (OEIC)
20
Q
What is the minimum amount of approved securities that must be in a securities fund?
A
90%
21
Q
What are the four standards that a trustee and unit trust managers must ensure the market meets?
A
The market must be liquid and meet these four requirements:
- regulated
- operating regularly
- recognised (eg by a statutory body)
- open to the public
22
Q
How often must a firm carry out a review of the non-EU markets they consider eligible for each fund?
A
Annually
23
Q
What are UCITS schemes?
A
Investment funds established in accordance with the EU UCITS scheme and can be freely marketed to other EU states
24
Q
In a retail UCITS fund (not index tracking), what is the maximum amount of shares that can be held within one company?
A
10%
25
How many separate shareholdings can a retail UCITS fund hold at the maximum 10% holding?
4
26
Beyond the four shareholdings at 10%, what is the maximum amount of shares that can be held within one company in a retail UCITS fund?
5%
27
In a retail UCITS fund (index tracking), what is the maximum amount of shares that can be held within one company?
20%
| 35% in exceptional circumstances
28
In a UCITs fund, what is the maximum amount of investments allowed to be issued by the same group?
20%
29
If a fund invests in more than 35% government fixed-securities issued by a single issuer, what is the minimum issues of stock that they must invest in?
6 different issues
| no single stock can exceed 30%
30
In a UCITs scheme, what percentage can be held in unapproved securities?
10%
31
In a UCITs scheme, what percentage, can be held in units of another collective investment scheme?
20%
32
In a non-UCITs scheme, what percentage can be held in unapproved securities?
20%
33
In a non-UCITs scheme, what percentage, can be held in units of another collective investment scheme?
35%
34
In a retail UCITs scheme, how much can be borrowed on a temporary basis against cash flows?
10%
35
In a non-retail UCITs scheme, how much can be borrowed on a permanent basis against cash flows?
10%
36
In a QIS, how much can be borrowed provided arrangements are in place for repayment?
100% of NAV
37
The FCA will only authorise schemes that are what?
Sufficiently diversified and invest in a range of permitted assets
38
What does the FCA refer to UCIS as?
Non-mainstream Pooled Investment (NMPI)
39
What is the marketing of UCIS limited to?
Sophisticated investors and HNW individuals
40
What is the difference between UCITs and UCIS?
UCITs: regulated scheme that meets EU requirements and can be marketed
UCIS: Unregulated, cannot be marketed to retail investors
41
What is the EU transparency directive?
- Aim: to ensure transparency of information through regular flow of info to public
- Sets out specific requirements on annual/half-yearly reporting & voting rights
42
What does the Alternative Investment Fund Manager Directive (AIFMD) do?
Concerns the management, admin marketing of alternative investment funds
Aim: increase investor protection/reduce risk
43
What is an Alternative Investment Fund (AIF)? Give examples
Not regulated at EU level
Include:
- Hedge funds
- Private equity funds
- Retail investment funds
- Investment companies
- Real estate funds
44
What is the primary objective of the trustee of a fund?
Protect investor
45
How is protection ensured in a fund?
Legally binding trust deed
46
Who legally holds the assets of the trust on behalf of the fund unitholders?
Trustee
47
Who is responsible for the day-to-day running of the investment fund?
Investment manager
48
What must the investment manager be authorised to do?
Conduct investment business in the UK
49
What must the trustee of a fund be regulated by?
FCA
50
To be marketed publicly, what must the investment fund be?
Authorised by FCA
51
How does a trustee ensure that the the investors' interests are protected?
- Checking manager's actions are in line with regulations
- Ensuring fund manager invests in line with investment objectives
- Holding/controlling assets, ensuring they are held by competent custodian
52
Who is formally required to be independent of the management group of a scheme?
Trustee
53
Who is a trustee usually?
Large bank or major insurance company
54
When can a unit trust trustee replace a manager?
- If the manager goes into liquidation/insolvency
| - If the manager is not acting in the unitholder's best interests
55
Who is the legal owner of the unit trusts assets?
Trustee
56
The securities of a unit trust are registered in which name?
Trustee
57
Who collects/holds income of a unit trust?
Trustee
58
What are some of the trustee's responsibilities?
- Arranging the auditing of the trust and issuing financial statements
- Monitoring the calculation of unit prices
- Arranging meetings for unitholders
- Setting up a register of unit holders and issuing certificates
- Distributing the income of the trust to unitholder
- Making any provisions for trust to be recognised as pension/charitable scheme
59
What are the unit trust manager's duties/responsibility?
- Be an authorised person
- Have adequate financial resources
- Manage the assets of the trust in accordance with regulations, trust deed and scheme particulars
- Supply information to the trustee when requested
- Maintain a record of units for inspection by trustee
- Notify trustee/FCA of any breached rules
60
Who is responsible for the promotion, marketing and selecting investments in a unit trust?
Manager
61
If a manager sub-contracts someone to make investment decisions, who holds responsibility?
Manager
62
Whose duty is it to hold a register of unitholders?
Trustee
63
What must the contents of the register of unitholders include?
1) Name and address of unitholder
2) Number of units of each type held
3) Date on which the holder was registered
64
Do certificates need issuing for unit trusts?
More commonly, investors received periodic statements detailing units held instead of certificates
65
If a certificate for a unit trust is issued, what must it show?
- Date
- Name of scheme
- Names and addresses of manager and trustee
- Number and types of units held
- Name of unitholder
66
What reports must unit trusts publish?
Annual and half yearly
Content of reports set out in SORP
67
How are unitholder's rights protected (three levels)?
1. By trustees
2. Regulatory organisations set up under FSMA
3. By complaints and arbitration procedures
68
What is the notice that the manager of a unit trust must provide, if you would like to amend fees?
60 days minimum
69
A manager cannot be removed without the approval of?
FCA
70
How can investors gain tax relief on annual management expenses of a unit trust?
Offset against non-dividend income for tax relief
71
What is the capital gains tax treatment of unit trusts?
Do not pay CGT nor tax on income/gains derived from options or futures
72
Interest and rental income and subject to what corporation tax (unit trust)?
20%
73
How are dividends treated on an unit trust fund?
Received as franked investment income and flow through to dividend distributions payable by the unit trust with no tax liability
(Investor receives gross tax/subject to dividend tax)
74
What investments are considered as NMPIs? And so are subject to marketing restrictions?
- Units in qualified investor scheme (QIS)
- Traded life policy investments
- Units in UCIS
- SPVs
75
What is a NMPI?
Non-Mainstream Pooled Investment
76
What investments are not considered to be NMPIs? And so are NOT subject to marketing restrictions?
- Exchange traded products
- Overseas investment companies that meet investment trust status in UK
- REITs
- VCTs
- EISs/SEISs
- SPVs
77
What can funds that distribute interest rather than dividends can deduct the interest as what??
As an expense for corporation tax purposes to ensure there is no double taxation
78
What is an equalisation payment?
Represents a partial refund of the original capital invested is not subject to income tax.
It must be deducted from purchase price of units to identify acquisition value for CGT purposes.
79
What does an income distribution voucher detail?
Allocation is broken down between franked/unfranked income and equalisation
80
What distributions do equity funds and bond funds make?
Equity funds: Dividend distribution
| Bond funds: Interest distribution
81
What is the maximum amount of investments in interest-bearing investments that a unit trust can hold to pay dividends?
60%
82
What is the dividend allowance?
£2000
83
What is the taxation of dividends?
7. 5% basic rate
32. 5% higher rate
38. 1% additional rate
84
(unit trusts) When equity funds are held within a discretionary trust, what rate are the trustees liable to pay income tax at on the dividends they receive?
38.1% (same as additional rate)
£2000 allowance does not apply but dividends that fall within £1000 standard rate band only taxed at 7.5%
85
What is the minimum amount of investments in interest-bearing investments that a unit trust can hold to pay interest distributions?
60%
86
When gilt and corporate bond funds are held within a discretionary trust, trustees are liable to pay an income tax of what?
45% on the distribution received
Those received within standard rate band of £1000 taxed at 20%
87
If dividends/interest is reinvested into a unit trust in accumulation units, what is the tax treatment?
Treated as income
88
Are internal capital gains with an authorised unit trust liable to corporation tax?
No
89
How is the taxable gain/profit on disposal of a unit trust unit calculated?
- Original cost deducted from sale proceeds
- Any losses deducted
- Minus annual exemption of: £12,300
90
What is the term for selling and buying back units of a unit trust in the following day without changing units held
Bed and breakfasting
91
A sale and repurchase agreement within what amount of days is ignored? (as a result of bed and breakfasting unit trusts)
30 days
92
What does it mean if an investment fund is treated as a tax-elected fund (TEF)?
It can divide distributions into UK dividend and non-dividend (interest) payments
93
What is the intention of the tax elected fund (TEF) regime?
Investor will be taxed as if they invested in assets directly
94
If a unit trust deducts charges from the capital (enhancing the quoted yield, reducing capital performance) what must they do?
Must include statement reflecting this policy in all documentation and state the risk to the growth of the capital as a result
95
What is an accumulation unit?
Add all income from underlying investments into the investors holding (reinvests income).
96
What is an income unit?
Pay out the income to the investor
97
How does an accumulation unit affect unit price?
Unit price increases to reflect retained income.
98
How does an income unit affect unit price?
Price of income units will be lower than accumulation
99
When an income comes into a unit trust fund, what happens to the unit price?
Rises
100
When the accounting date is passed and the income has been paid, what is the unit price marked as?
xd - ex distribution
101
How long can an xd period on a unit price be?
No more than 4 months after the end of each annual/interim accounting period
102
If unitholders sell their units during an xd period, who receives the allocation attributable to the previous period?
Seller, not buyer
103
A unit trust can be held in an ISA, what benefit does this have
Exemption from CGT on any realised gains
104
What must investors be supplied with (detailing main aspects of fund and charges) before a transaction for a unit trust investment?
KIID
105
How can investors buy/sell unit trust holdings?
- Phone
- Online
- Completing an application form (to buy) or renunciation (to sell)
- Through a financial advisor
106
How do you sell units of a unit trust
Order is placed with the management group, which will then issue a contract note
107
What do share exchange facilities allow?
Investors to exchange existing shareholdings in public companies for an equivalent value in the fund's units
108
What is the tax position of a share exchange scheme?
- Selling shares is still a disposal for CGT purposes
| - Investor will pay CGT if it exceeds allowance
109
What are the two kinds of pricing regulations that investment managers may adopt for unit trusts?
Single pricing or dual pricing
110
What is dual pricing?
FCA determines:
- Highest price at which units can be sold to investors (Bid)
- Lowest price at which the managers can repurchase from investors (Offer)
111
What is single pricing?
Uses mid-market prices for underlying investments, incoming and outgoing investors deal at the same price.
112
How do you calculate the buying/offer price?
- Take market buying value of underlying securities at published valuation point
- Add on costs of buying
- Add on all other property less tax/fees/charges
- Divide by total number of units
- Add on initial charge and express to 4 s.f
113
How do you calculate the buying/offer price?
- value underlying securities at best market price
- deduct dealing costs
- add in any uninvested cash
- add any accrued income after fees/charges/taxes
- divide by total number of units
- express to 4 s.f
114
What is a bid-offer price?
Difference between the buying and selling prices expressed as % of buying price, inc dealing costs and initial charges
115
If the demand is high, the manager will set the price at which end of the bid-offer spectrum?
Buying/offer price
116
If the demand is low, the manager will set the price at which end of the bid-offer spectrum?
Selling/bid price
117
What does box management refer to?
Describes stock control mechanism applied by managers in buying and selling
118
What is the valuation point?
Time of day that managers carries out valuation
119
What is forward pricing?
At the price to be calculated at the next valuation point
120
What is historic pricing?
At the price calculated at the last valuation point
121
What are the different charges/fees that an investor may incur when investing in a unit trust?
- Initial charge
- Annual management fees
- Performance fees
- Exit fees
- Other charges ie legal
122
What is the underlying legal structure of an OEIC?
A company
123
How do OEICs differ from companies?
Not established under the Companies Act
124
Who is the OEIC operated by?
Board of directors (may comprise of single ACD)
125
Who holds the assets of an OEIC?
Independent depository
126
The ACD and the depository of an OEIC must be what?
Authorised persons
127
How does an OEIC differ from a unit trust?
- Self contained company which has its own constitutional documents and annual meeting
- Can be stand-alone or umbrella fund
- Issues shares rather than units
- Appoints directors inc ACD
- Single pricing is USUALLY used
128
What is the limit on borrowing for an OEIC/unit trust?
Must not exceed 10% of fund and must be temporary
129
What is the ACD responsible for? (OEIC)
- Compliance with investor protection requirements
- Register of shareholders
- Day-to-day management
- Preparation of accounts
- Management of investments
130
What is the independent depository responsible for? (OEIC)
Overseeing the management of the OEIC in relation to investor protection
Including:
- Valuation, pricing and dealing
- Collection of income
- Safekeeping of assets
- Ensuring ACD exercises investment/borrowing powers
131
What must an OEIC's scheme holder do?
- Report to holders twice a year (once audited/once unaudited)
- Must produce reports that comply with OEIC's statement of Recommended Practice
- May issue short-form accounts
- Must make available full accounts
132
Can OEICs be linked to ISAs?
Yes
133
What does each share price reflect in an OEIC?
Total net value of fund's assets related to share class divided by number of shares in issue (NAV per share)
134
What are the assets in an OEIC valued at?
- Mid-market price where there is a market dealing spread
| - The only price if that is all thats available
135
Where single pricing is used, what are shares purchased from the ACD at?
Single price plus an initial charge to cover sales and management expenses
136
What are the advantages of OEICs?
- Most widely recognised in Europe and can be marketed freely
- More flexible charging and currency structures than unit trusts due to multiple share classes
- Allows umbrella funds
- Umbrella structure makes it easier to make new funds
137
How are OEICs taxed?
- Corporation tax payable by OEIC on income received less chargeable expenses of management
- Dividends paid gross (subject to same treatment as distribution on unit trusts)
- Internal gains exempt from corp tax
- Personal CGT on sale of OEIC or switch in class held
138
What are the two types of multi manager fund?
Manager of managers funds
| Fund of funds
139
What is a manager of managers funds?
- Overall fund manager decides asset allocation
| - Each individual asset class will be managed by its own fund manager
140
What is a fund of funds?
Manager selects individual funds with the view to maximise returns
141
What is a fettered fund of funds?
Only invests in funds run by same management group
142
What is an unfetterd fund of funds?
Can invest in funds ran by different management groups
143
Why does a fund of funds structure provide a CGT shelter?
Switching between funds by the manager does not create a CGT liability
144
Which costs are more transparent; fund of funds or manager of managers funds?
Manager of manager's funds
145
What is a platform
Offer access to wide range of investment funds/collective investments. Investor's holdings are all shown in a single account, enabling view of total assets and allocations.
146
What are the three sections of the FSMA 2000 that offshore bonds fall into?
1) Funds categorised as UCITs under EU legislation; receive automatic recognition
2) Certain funds in 'designated' territories
3) Fund from outside 'designated' territories but recognised by FCA in own right
147
Can approved offshore funds be marketed through cold calling?
No because cancellation rules do not apply
148
What are the advantages of a reporting offshore fund?
Dividends and interest are treated in the same way as UK based funds, any gains subject to usual CGT treatment
149
What is the minimum amount of interest-bearing securities that must be held in an offshore fund to pay interest distributions?
60%
150
What is the interest from an offshore fund taxed at?
Basic rate: 20% (£1000 PSA)
Higher rate: 40% (£500 PSA)
Additional rate: 45% (£0 PSA)
151
What can investment trusts invest in?
- Invest in any kind of company (listed or unquoted shares)
- Provide venture capital
- Invest in any country in the world
152
How are investment trusts structured?
- Same way as normal companies
- Issue a fixed number of shares (close ended)
- Regulated by company law and shares are traded on the London Stock Exchange
153
Can investment trusts using gearing?
Yes
154
Who runs an investment trust?
Independent board of directors who is responsible for looking after the interests of the shareholders
155
What does the price of a an investment trust share depend on?
Supply and demand
156
What two prices of a investment trust share are quoted by the investment managers?
- Higher, buying/offer price
| - Lower, selling/bid price
157
How do you calculate the NAV per share of an investment trust? (simple approach)
- Total value of a trust's listed investments at mid-market price
- Plus its unlisted investments
- Plus cash and any other assets
- Less the nominal value of loans, debentures and preference shares
= Shareholders funds
158
What is the difference between diluted NAV per share and undiluted NAV per share?
Diluted = Assumes all outstanding warrants/convertible loan stock has been exercised
