Chapter 11 - Other investment classes Flashcards
What is a collective investment scheme?
A CIS provides
- structures for the management of investments on a grouped basis
- opportunity for investors to achieve a widespread of investments to lower portfolio risk
- indirect investment (investment through the scheme rather than direct purchase of the underlying assets
- a stated investment objective
- investment expertise and diversification
What will the general regulations cover in a CIS?
- categories of the assets to be held
- whether unquoted shares can be held
- maximum level of gearing
- any tax relief available
What are the two fundamental types of CIS’s and outline their structure?
Closed-ended schemes:
- once the initial tranche of money has been invested, the fund is closed to new money
- only way of investing after launch is to buy units from a willing seller
- total number of share/units available to the market is fixed
Open-ended schemes:
- managers can create or cancel units in the fund as new money is invested or disinvested
What is an investment trust? Expand on their share price and the main parties involved.
- form of closed-ended fund
- public companies whose function is to manage shares and other information
- can raise both loan and equity capital
Share price:
- investor will buy from another investor
- share price might be exected to be the NAV
Parties involved
- board of directors
- investment managers
- shareholders
What is a unit trust? Expand on the unit price and the main parties involved.
- open-ended investment vehicle
- investors can buy units in an underlying pool of assets from the trust manager
- managers can create more units or buy them back
- have limited powers to borrow
Unit Price:
- (market value of underlying shares)/no of units
Main parties involved
- management company
- trustees
investors
What is an open-ended investment company?
- investment vehicle similar in corporate governance features to an investment trust but with open-ended characteristics of a unit trust
- ‘single price’ to which is added the initial charge for purchase
What are the differences between closed-ended and open-ended CISs?
- marketability of the shares of closed-ended funds is often less than the marketability of their underlying assets whereas the marketability of units in an open-ended fund is guaranteed by the managers
- gearing of closed-ended funds can make their share price more volatile than that of the underlying equity while most open-ended funds cannot be geared or only geared to a limited extent
- may be possible to buy assets at less than the net asset value in a closed-ended fund
- increased volatility of closed-ended funds means they should provide a higher expected return
- share prices in closed-ended fund are more volatile than prices of the underlying equity because the size of the discount can change while the volatility of unit prices in open-ended funds should be similar to that of the underlying equities
- at any point in time there may be uncertainty as to the true level of the NAV of a closed-ended fund
- closed-ended funds might be able to invest in a wider range of assets than unit trusts
- they may be subject to tax at different rates
What are the advantages of CISs compared to direct investment?
- they are useful for obtaining specialist expertise
- easy way of obtaining diversification
- some of the costs of direct investment management are avoided
- holdings are divisible
- may be tax advantages
- may be marketability advantages
- can be used to track the return on a specific index (index tracker funds)
What are the disadvantages of CISs compared to that of direct investment?
- loss of control (invetsor has no control over the individual investments chosen by the managers)
- management charges incurred
- tax disadvantages such as withholding tax which cannot be reclaimed
what is a forward contract and how are they traded?
- a contract to buy (or sell) an asset on an agreed basis in the future
- non-standardised (details of the contract will be tailor-made and negotiated between two parties)
- traded over-the-counter
- degree of credit risk depends on the creditworthiness of the counterparty
What is a future and how are they traded?
- a contract to buy (or sell) an asset o an agreed basis in the future
- ## standardized contracts that can be traded on a recognized exchange
What is meant by exchange-traded for futures contracts? How is it achieved or managed?
- functions of the exchange:
- setting the details of the standardised contracts
- authorising who can trade on the exchange and bringing buyers and sellers together
- operating a sub-institution called the clearing house
Clearing house:
- only function to clear futures trades and settle margin payments
- removing the credit risk
- each party makes a small good faith initial margin and then the variation margin depends on the movement in the price of underlying
