Ch11: Other investment classes Flashcards
Collective investment scheme description
- Provide structures for the management of investments on a grouped basis
- Provide opportunity for investors to achieve a wide spread of investments and therefore to lower portfolio risk
- Wil have a stated investment objective
- Managers of such schemes are likely to have management expertise in the underlying investments or asset classes which is otherwise available only to large institutional investors
Regulation regarding collective investment schemes may cover: (4)
- Categories of assets that can be held
- Whether unquoted assets can be held
- Maximum level of gearing
- Tax relief available
Closed-ended vs open-ended investment schemes
- Closed-ended
* Fund is closed to new money after initial tranche of money has been invested
* After launch, only way to invest is by buying units from a willing seller - Open-ended
* Managers can create or cancel units in the fund as money is invested or disinvested
Open ended unit trust description
- Open-ended so good marketability but fund must keep some assets aside to meet unit redemptions - returns impacted
- May not be able to invest new cash quickly
- May be a forced seller of assets to meet unit redemptions
- Unlikely to be able to borrow -> impact on returns
- Unit price based on NAV
- Unit price is calculated and published daily - allows investors to track performance and easy to determine asset valuation
Investment trust company description
- Governed by company law
- Closed ended so marketability for investors not guaranteed but does not have to keep cash to redeem units and less likely to be a forced seller of assets to redeem units
- May use gearing - Higher expected returns but may be more volatile
- Shares may be listed on stock exchange
- NAV only published as required , twice a year, more difficult to monitor performance
- Share price unlikely to be the same as NAV
Investment trust company shares: Discount to NAV (5)
- Management costs
- Uncertainty in the NAV of underlying assets - investors want a margin of safety (e.g. assets may be unlisted or financials only available after reporting)
- Uncertainty about management’s ability to manage and grow the underlying assets
- If company uses gearing, creates risk and uncertainty -> investors may want to pay less than NAV as a result
- If marketability is poor, investors may require a discount to NAV
- Market sentiment/fashion
Pros and cons of collective investment schemes vs direct investment (7&3)
Pros
* Useful for gaining specialist expertise
* Easy way of obtaining diversification
* Some costs of direct investment are avoided
* Holdings are divisble
* May be tax advantages
* May be marketability advantages (may also be less marketable than underlying assets)
* Can be used to track a return on a specific index
Cons
* Loss of control - no control over individual investments chosen by managers
* Management charges are incurred
* May be tax disadvantages such as withholding tax which cannot be reclaimed
Reasons for overseas investment (3)
- Match liabilities in a foreign currency
- Increase the expected returns
- Reduce risk by increasing the level of diversification
Problems with overseas investment (13)
- Different market performance to the home market and the associated market risk
- Currency fluctuation risk
- Increased expertise needed to assess the market
- Additional administartion functions: custodian, dividend tracking and collection
- Different tax treatment
- Different accounting practices
- Less info may be available than in the home market
- Language problems
- Time delays
- Poorer market regulations in some countries
- Risk of adverse political developments
- Liquidity
- Restrictions on ownership on certain shares
Factors to consider when investing in emerging markets (10)
- Current market valuation
- Possibility of high economic growth rate
- Currency stability and strength
- Level of marketbility
- Degree of political stability
- Market regulation
- Restrictions on foreign investment
- Range of companies available
- Communication problems
- Availability and quality of information
