Chapter 16 Flashcards
3 types of basic financial intermediary
Banks
Contractual institutions - pension and life funds
Investment intermediaries - hedge funds
Advantages of collective investment vehicles
Pooling investments lowers investment costs
Professionally managed
Greater diversification
Possible to achieve specialisation
Access to foreign investments
Disadvantage of collective investment vehicles
Cannot choose individual investments in portfolio
Manager performance is variable
4 main types of investment vehicle
Open ended investment companies
Unit trusts
Investment trusts
Life assurance based schemes
Which investment vehicle is open and closed ended
Open ended investment company and unit trust are open
Investment trust is closed
What are collective investment vehicles regulated by
FCA
What are the regulated collective investment vehicles
Open ended investment companies
Authorised unit trust
Recognised scheme permitted to operate in Uk
What can authorised schemes be split into
Ucits
QIS
Non ucits
Three institutions involved in unit trust
Unit trust manager
Trustee
Investment manager
How can authorised unit trusts price their trust
Dual pricing
Single pricing
Unit trust is authorised if manger and trustee are ….
Independent of each other
Each be a company in operated in eu or uk
Have place of business in uk
Be an authorised person
Who looks after defunds for open ended investment company
Depository - usually a bank
Transferable securities ?
Securities to which title can be freely transferred like shares
Features of important borrowing and investment powers for uk ucits are
Up to 5 percent of investment by one issuer
No limit on Gov or public securities
Can only borrow up to 10 percent of nav
No over concentration
ETFs
Traded on stock exchange and mirror the price movements of the underlying index, sector or commodity
Positives of etfs
Greater diversification
Lower costs
Increase transparency
Greater liquidity
Negatives of etf
Easily lure people into asset class that they are unsure about
Leveraged instruments not understood by investors
Different costs involved in ETFs
Who can create and redeem new shares for etf
Authorised participants
How are shares created by authorised participants
Uses the creation list as proposed by the etf manager
AP then goes into market and buys components of list in correct proportion
Ap then gives these to etf manager in exchange for etf shares which are then sold on market
What are transactions between AP and etf manager known as
Creation units and often in blocks of 50000 shares
Factors that affect the bid ask price and nav of etf
Cost of buying and selling securities
Vol of prices
Liquidity of markets
Synthetic ETFs
No need to buy index underlying, instead bank commits to paying returns on an index through use of derivative contracts
Exchange traded commodity
Is an exchange traded note that tracks individual commodities or board commodity indices
What is an exchange traded note
Senior unsubordinated debt instrument issued by a single bank and listed on exchange
How are etc and etn work
Issued off balance sheet
Etns collaterised with Gov bonds or blue chip stocks that are ring fenced
What do Investment trust companies offer and what type of company are they
Offers both corporate and private individuals a way to purchase diversified portfolio of securities
They are LLCs
Characteristic of investment trust company
Closed ended
Raise more capital by rights issue or borrowing
Investment trust companies fees
1.2 percent of the value of fund each year
What does the ongoing charges figure include
Annual management charge
Admin services
What does the ongoing charges figure not include
Performance fees
Trading costs
What rule has focused attention of charges on investment products
Mifid II
Total cost of investing in fund includes 3 things
Ongoing charges figure
Transaction costs
Any one off charges
Perf fees
What is a structured product
Well defined objectives in terms or irks and return
3 main types of structured product
Structured deposits
Structured capital
Structured capital at risk
What are structured deposits
Fixed term deposit account with the interest being determined by the performance of the underlying asset
What is structured capital
Similar to structured deposits but do not offer the guarantee of the insured capital if provider defaults
What is structured capital at risk
Full investment capital at risk if certain levels of the underlying are breached at certain points in a period
Key periods for structured products
One to two month offer period
Strike date
What are structured projects subject to
Capital gains tax
What are barrier levels
Key index levels below which the index must not fall
What do platforms do
Simplify and consolidate the investment process for investors
A generic term for investment account held on platform is a …
Wrap account
Fund supermarket?
Type of electronic platform that facilitates purchase sale and management of collective funds online
What is the NS&I
State owned saving bank of HM treasury and aims to attract individual saving funds in the uk to help gov funding needs
What is life assurance
Mix of life insurnace and long term savings
In exchange for a premium what can purchases of life assurance buy
Whole life policy which pays out lump sum at time of death
Endowment policy which pays out at end of specified period
What is defined contribution scheme
Contributions are fixed and benefits depend on performance of the fund, at retirement, accumulated savings paid out in annuity
What is longevity risk
Flexible withdrawing from defined contribution fund could result in pensioner running out of money
What is a defined benefit fund
Employers garentee benefits to pensioners based on final salary and years of contribution;
What is a wrap account
Single fee covers all costs.p charged to the account
Key thoughts when thinking about liquidity
Does illiquidity risk provide greater returns
Can portfolio access liquidity in case investors withdraw
Can underlying investments support liquidity demands
Why have high liquidity
Redemption requests met
To be able to provide collateral or margin quickly
To act on market dislocations quickly
What can be used to gain liquid exposure to illiquid assets
Derivatives
When does liquidity for derivatives improve
Stressed market conditions, increased demand for liquid market hedges
What is a gate
Slows down pace of redemptions
What type of class is not a share for a split capital trust
Foreign income shares
What is single pricing
Investor pays none of dealing costs
Buyers match seller when selling and buying
What is dual pricing
Consumers buy at offer price and sell at bid price
Offer price > bid price
What 3 classes are a share of split capital trust
Capital shares
Zero dividend preference shares
Income shares
What is a split capital trust
is a type of investment trust which issues different classes of share to give the investor a choice of shares to match their needs.
