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R02 > Ch 7 > Flashcards

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

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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
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3
Q

Who are the assets in a unit trust held by?

A

Trusteed

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4
Q

who are the assets in an OEIC held by?

A

Independent depository

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5
Q

What is sold to investors in an OEIC/unit trust?

A

Units or shares, representing small fraction of a portfolio

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6
Q

Are unit trusts/OEICs open ended or closed ended?

A

Open ended; units/shares can be created or issued

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7
Q

In unit trust/OEICs what does the unit/share price have a direct relationship with?

A

Value of underlying investments

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8
Q

Who regulates the sale and marketing of OEICs/unit trusts?

A

FCA

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9
Q

Name some IA categories of funds

A
  • Capital protection
  • Income
  • Growth
  • Specialist funds
  • Those targeting an outcome
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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%

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11
Q

To qualify as an income fund, what is the minimum yield of the relevant index that must be achieved?

A

90%

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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

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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

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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

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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

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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

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17
Q

Where must detailed limits of a scheme be set out?

A

Scheme particulars/prospectus

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18
Q

Who monitors the investment limits in a scheme?

A

Trustee (unit trust) or depository (OEIC)

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19
Q

The general limits of an individual fund may be laid out where?

A 
Trust deed (unit trust) 
Instrument of incorporation (OEIC)
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20
Q

What is the minimum amount of approved securities that must be in a securities fund?

A

90%

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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
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22
Q

How often must a firm carry out a review of the non-EU markets they consider eligible for each fund?

A

Annually

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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

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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%

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25
Q

How many separate shareholdings can a retail UCITS fund hold at the maximum 10% holding?

A

4

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26
Q

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?

A

5%

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27
Q

In a retail UCITS fund (index tracking), what is the maximum amount of shares that can be held within one company?

A

20%

35% in exceptional circumstances

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28
Q

In a UCITs fund, what is the maximum amount of investments allowed to be issued by the same group?

A

20%

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29
Q

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?

A

6 different issues

no single stock can exceed 30%

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30
Q

In a UCITs scheme, what percentage can be held in unapproved securities?

A

10%

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31
Q

In a UCITs scheme, what percentage, can be held in units of another collective investment scheme?

A

20%

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32
Q

In a non-UCITs scheme, what percentage can be held in unapproved securities?

A

20%

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33
Q

In a non-UCITs scheme, what percentage, can be held in units of another collective investment scheme?

A

35%

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34
Q

In a retail UCITs scheme, how much can be borrowed on a temporary basis against cash flows?

A

10%

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35
Q

In a non-retail UCITs scheme, how much can be borrowed on a permanent basis against cash flows?

A

10%

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36
Q

In a QIS, how much can be borrowed provided arrangements are in place for repayment?

A

100% of NAV

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37
Q

The FCA will only authorise schemes that are what?

A

Sufficiently diversified and invest in a range of permitted assets

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38
Q

What does the FCA refer to UCIS as?

A

Non-mainstream Pooled Investment (NMPI)

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39
Q

What is the marketing of UCIS limited to?

A

Sophisticated investors and HNW individuals

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40
Q

What is the difference between UCITs and UCIS?

A

UCITs: regulated scheme that meets EU requirements and can be marketed
UCIS: Unregulated, cannot be marketed to retail investors

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41
Q

What is the EU transparency directive?

A
  • Aim: to ensure transparency of information through regular flow of info to public
  • Sets out specific requirements on annual/half-yearly reporting & voting rights
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42
Q

What does the Alternative Investment Fund Manager Directive (AIFMD) do?

A

Concerns the management, admin marketing of alternative investment funds
Aim: increase investor protection/reduce risk

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43
Q

What is an Alternative Investment Fund (AIF)? Give examples

A

Not regulated at EU level

Include:

  • Hedge funds
  • Private equity funds
  • Retail investment funds
  • Investment companies
  • Real estate funds
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44
Q

What is the primary objective of the trustee of a fund?

A

Protect investor

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45
Q

How is protection ensured in a fund?

A

Legally binding trust deed

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46
Q

Who legally holds the assets of the trust on behalf of the fund unitholders?

A

Trustee

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47
Q

Who is responsible for the day-to-day running of the investment fund?

A

Investment manager

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48
Q

What must the investment manager be authorised to do?

A

Conduct investment business in the UK

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49
Q

What must the trustee of a fund be regulated by?

A

FCA

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50
Q

To be marketed publicly, what must the investment fund be?

A

Authorised by FCA

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51
Q

How does a trustee ensure that the the investors’ interests are protected?

A
  • 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
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52
Q

Who is formally required to be independent of the management group of a scheme?

A

Trustee

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53
Q

Who is a trustee usually?

A

Large bank or major insurance company

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54
Q

When can a unit trust trustee replace a manager?

A
  • If the manager goes into liquidation/insolvency

- If the manager is not acting in the unitholder’s best interests

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55
Q

Who is the legal owner of the unit trusts assets?

A

Trustee

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56
Q

The securities of a unit trust are registered in which name?

A

Trustee

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57
Q

Who collects/holds income of a unit trust?

A

Trustee

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58
Q

What are some of the trustee’s responsibilities?

A
  • 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
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59
Q

What are the unit trust manager’s duties/responsibility?

A
  • 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
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60
Q

Who is responsible for the promotion, marketing and selecting investments in a unit trust?

A

Manager

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61
Q

If a manager sub-contracts someone to make investment decisions, who holds responsibility?

A

Manager

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62
Q

Whose duty is it to hold a register of unitholders?

A

Trustee

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63
Q

What must the contents of the register of unitholders include?

A

1) Name and address of unitholder
2) Number of units of each type held
3) Date on which the holder was registered

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64
Q

Do certificates need issuing for unit trusts?

A

More commonly, investors received periodic statements detailing units held instead of certificates

65
Q

If a certificate for a unit trust is issued, what must it show?

A
  • Date
  • Name of scheme
  • Names and addresses of manager and trustee
  • Number and types of units held
  • Name of unitholder
66
Q

What reports must unit trusts publish?

A

Annual and half yearly

Content of reports set out in SORP

67
Q

How are unitholder’s rights protected (three levels)?

A
  1. By trustees
  2. Regulatory organisations set up under FSMA
  3. By complaints and arbitration procedures
68
Q

What is the notice that the manager of a unit trust must provide, if you would like to amend fees?

A

60 days minimum

69
Q

A manager cannot be removed without the approval of?

A

FCA

70
Q

How can investors gain tax relief on annual management expenses of a unit trust?

A

Offset against non-dividend income for tax relief

71
Q

What is the capital gains tax treatment of unit trusts?

A

Do not pay CGT nor tax on income/gains derived from options or futures

72
Q

Interest and rental income and subject to what corporation tax (unit trust)?

A

20%

73
Q

How are dividends treated on an unit trust fund?

A

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
Q

What investments are considered as NMPIs? And so are subject to marketing restrictions?

A
  • Units in qualified investor scheme (QIS)
  • Traded life policy investments
  • Units in UCIS
  • SPVs
75
Q

What is a NMPI?

A

Non-Mainstream Pooled Investment

76
Q

What investments are not considered to be NMPIs? And so are NOT subject to marketing restrictions?

A
  • Exchange traded products
  • Overseas investment companies that meet investment trust status in UK
  • REITs
  • VCTs
  • EISs/SEISs
  • SPVs
77
Q

What can funds that distribute interest rather than dividends can deduct the interest as what??

A

As an expense for corporation tax purposes to ensure there is no double taxation

78
Q

What is an equalisation payment?

A

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
Q

What does an income distribution voucher detail?

A

Allocation is broken down between franked/unfranked income and equalisation

80
Q

What distributions do equity funds and bond funds make?

A

Equity funds: Dividend distribution

Bond funds: Interest distribution

81
Q

What is the maximum amount of investments in interest-bearing investments that a unit trust can hold to pay dividends?

A

60%

82
Q

What is the dividend allowance?

A

£2000

83
Q

What is the taxation of dividends?

A
  1. 5% basic rate
  2. 5% higher rate
  3. 1% additional rate
84
Q

(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?

A

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
Q

What is the minimum amount of investments in interest-bearing investments that a unit trust can hold to pay interest distributions?

A

60%

86
Q

When gilt and corporate bond funds are held within a discretionary trust, trustees are liable to pay an income tax of what?

A

45% on the distribution received

Those received within standard rate band of £1000 taxed at 20%

87
Q

If dividends/interest is reinvested into a unit trust in accumulation units, what is the tax treatment?

A

Treated as income

88
Q

Are internal capital gains with an authorised unit trust liable to corporation tax?

A

No

89
Q

How is the taxable gain/profit on disposal of a unit trust unit calculated?

A
  • Original cost deducted from sale proceeds
  • Any losses deducted
  • Minus annual exemption of: £12,300
90
Q

What is the term for selling and buying back units of a unit trust in the following day without changing units held

A

Bed and breakfasting

91
Q

A sale and repurchase agreement within what amount of days is ignored? (as a result of bed and breakfasting unit trusts)

A

30 days

92
Q

What does it mean if an investment fund is treated as a tax-elected fund (TEF)?

A

It can divide distributions into UK dividend and non-dividend (interest) payments

93
Q

What is the intention of the tax elected fund (TEF) regime?

A

Investor will be taxed as if they invested in assets directly

94
Q

If a unit trust deducts charges from the capital (enhancing the quoted yield, reducing capital performance) what must they do?

A

Must include statement reflecting this policy in all documentation and state the risk to the growth of the capital as a result

95
Q

What is an accumulation unit?

A

Add all income from underlying investments into the investors holding (reinvests income).

96
Q

What is an income unit?

A

Pay out the income to the investor

97
Q

How does an accumulation unit affect unit price?

A

Unit price increases to reflect retained income.

98
Q

How does an income unit affect unit price?

A

Price of income units will be lower than accumulation

99
Q

When an income comes into a unit trust fund, what happens to the unit price?

A

Rises

100
Q

When the accounting date is passed and the income has been paid, what is the unit price marked as?

A

xd - ex distribution

101
Q

How long can an xd period on a unit price be?

A

No more than 4 months after the end of each annual/interim accounting period

102
Q

If unitholders sell their units during an xd period, who receives the allocation attributable to the previous period?

A

Seller, not buyer

103
Q

A unit trust can be held in an ISA, what benefit does this have

A

Exemption from CGT on any realised gains

104
Q

What must investors be supplied with (detailing main aspects of fund and charges) before a transaction for a unit trust investment?

A

KIID

105
Q

How can investors buy/sell unit trust holdings?

A
  • Phone
  • Online
  • Completing an application form (to buy) or renunciation (to sell)
  • Through a financial advisor
106
Q

How do you sell units of a unit trust

A

Order is placed with the management group, which will then issue a contract note

107
Q

What do share exchange facilities allow?

A

Investors to exchange existing shareholdings in public companies for an equivalent value in the fund’s units

108
Q

What is the tax position of a share exchange scheme?

A
  • Selling shares is still a disposal for CGT purposes

- Investor will pay CGT if it exceeds allowance

109
Q

What are the two kinds of pricing regulations that investment managers may adopt for unit trusts?

A

Single pricing or dual pricing

110
Q

What is dual pricing?

A

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
Q

What is single pricing?

A

Uses mid-market prices for underlying investments, incoming and outgoing investors deal at the same price.

112
Q

How do you calculate the buying/offer price?

A
  • 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
Q

How do you calculate the buying/offer price?

A
  • 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
Q

What is a bid-offer price?

A

Difference between the buying and selling prices expressed as % of buying price, inc dealing costs and initial charges

115
Q

If the demand is high, the manager will set the price at which end of the bid-offer spectrum?

A

Buying/offer price

116
Q

If the demand is low, the manager will set the price at which end of the bid-offer spectrum?

A

Selling/bid price

117
Q

What does box management refer to?

A

Describes stock control mechanism applied by managers in buying and selling

118
Q

What is the valuation point?

A

Time of day that managers carries out valuation

119
Q

What is forward pricing?

A

At the price to be calculated at the next valuation point

120
Q

What is historic pricing?

A

At the price calculated at the last valuation point

121
Q

What are the different charges/fees that an investor may incur when investing in a unit trust?

A
  • Initial charge
  • Annual management fees
  • Performance fees
  • Exit fees
  • Other charges ie legal
122
Q

What is the underlying legal structure of an OEIC?

A

A company

123
Q

How do OEICs differ from companies?

A

Not established under the Companies Act

124
Q

Who is the OEIC operated by?

A

Board of directors (may comprise of single ACD)

125
Q

Who holds the assets of an OEIC?

A

Independent depository

126
Q

The ACD and the depository of an OEIC must be what?

A

Authorised persons

127
Q

How does an OEIC differ from a unit trust?

A
  • 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
Q

What is the limit on borrowing for an OEIC/unit trust?

A

Must not exceed 10% of fund and must be temporary

129
Q

What is the ACD responsible for? (OEIC)

A
  • Compliance with investor protection requirements
  • Register of shareholders
  • Day-to-day management
  • Preparation of accounts
  • Management of investments
130
Q

What is the independent depository responsible for? (OEIC)

A

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
Q

What must an OEIC’s scheme holder do?

A
  • 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
Q

Can OEICs be linked to ISAs?

A

Yes

133
Q

What does each share price reflect in an OEIC?

A

Total net value of fund’s assets related to share class divided by number of shares in issue (NAV per share)

134
Q

What are the assets in an OEIC valued at?

A
  • Mid-market price where there is a market dealing spread

- The only price if that is all thats available

135
Q

Where single pricing is used, what are shares purchased from the ACD at?

A

Single price plus an initial charge to cover sales and management expenses

136
Q

What are the advantages of OEICs?

A
  • 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
Q

How are OEICs taxed?

A
  • 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
Q

What are the two types of multi manager fund?

A

Manager of managers funds

Fund of funds

139
Q

What is a manager of managers funds?

A
  • Overall fund manager decides asset allocation

- Each individual asset class will be managed by its own fund manager

140
Q

What is a fund of funds?

A

Manager selects individual funds with the view to maximise returns

141
Q

What is a fettered fund of funds?

A

Only invests in funds run by same management group

142
Q

What is an unfetterd fund of funds?

A

Can invest in funds ran by different management groups

143
Q

Why does a fund of funds structure provide a CGT shelter?

A

Switching between funds by the manager does not create a CGT liability

144
Q

Which costs are more transparent; fund of funds or manager of managers funds?

A

Manager of manager’s funds

145
Q

What is a platform

A

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
Q

What are the three sections of the FSMA 2000 that offshore bonds fall into?

A

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
Q

Can approved offshore funds be marketed through cold calling?

A

No because cancellation rules do not apply

148
Q

What are the advantages of a reporting offshore fund?

A

Dividends and interest are treated in the same way as UK based funds, any gains subject to usual CGT treatment

149
Q

What is the minimum amount of interest-bearing securities that must be held in an offshore fund to pay interest distributions?

A

60%

150
Q

What is the interest from an offshore fund taxed at?

A

Basic rate: 20% (£1000 PSA)
Higher rate: 40% (£500 PSA)
Additional rate: 45% (£0 PSA)

151
Q

What can investment trusts invest in?

A
  • Invest in any kind of company (listed or unquoted shares)
  • Provide venture capital
  • Invest in any country in the world
152
Q

How are investment trusts structured?

A
  • 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
Q

Can investment trusts using gearing?

A

Yes

154
Q

Who runs an investment trust?

A

Independent board of directors who is responsible for looking after the interests of the shareholders

155
Q

What does the price of a an investment trust share depend on?

A

Supply and demand

156
Q

What two prices of a investment trust share are quoted by the investment managers?

A
  • Higher, buying/offer price

- Lower, selling/bid price

157
Q

How do you calculate the NAV per share of an investment trust? (simple approach)

A
  • 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
Q

What is the difference between diluted NAV per share and undiluted NAV per share?

A

Diluted = Assumes all outstanding warrants/convertible loan stock has been exercised

R02 (8 decks)

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