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CISI - Portfolio Construction Theory in Wealth Management > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

For Funds, how do you calculate NAV?

A

assets owned by the fund company - liabilities

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2
Q

For funds, how do you calculate NAV per share?

A

(assets - liabilities)/shares or units in issue

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3
Q

What are the four main grouping of funds?

A
  • Growth
  • Income
  • Capital protection
  • Specialist funds
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4
Q

What securities are in growth funds?

A

Predominantly equity-like in character

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5
Q

What securities are in income funds?

A

FI, equity and mixed asset classes

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6
Q

What securities are in capital protection funds? (3)

A
  • money markets
  • short-term money markets
  • protected funds
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7
Q

What securities are inlcuded in specialist funds?

↩️🏠🌾🛢️🏦🏥🌉💻

A
  • absolute return
  • property
  • commodities
  • natural resources
  • Financial/Financial innovation
  • Healthcare
  • Infrastructure
  • Technology
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8
Q

What are the 6 main risks in fund investment?

A
  • Market
  • Liquidity
  • Credit
  • Inflation
  • Interest rate
  • Currency risk
  • Country risk
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9
Q

What are the 7 operational issues of fund investment?

A
  • Tax
  • Availability of pooled funds
  • Operational efficiency
  • Risk of default
  • Other risks i.e. fraud
  • Governance and transparency
  • Switching (entry and exit fees)
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10
Q

For preference shares, what are income shares? (2)

A
  • Pay regular dividends from surplus income
  • have a predetermined maturity value
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11
Q

For preference shares, what are capital shares? (3)

A
  • do not pay dividends
  • receive capital remaining
  • when preference and income shareholders have been paid
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12
Q

For preference shares, what are convertible preference shares?

A

can convert into ordinary shares

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13
Q

For preference shares, what are zero dividend preference (ZDP) shares? (2)

A
  • receive no dividends
  • return via difference between what was paid and what they receive at a fixed future date
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14
Q

Why are investors incentivised to invest on VCTs? (2)

A

to provide capital to smaller, start-up companies

hard to find funding for growth

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15
Q

What are the incentives for investors to invest in VCTs? (2)

A
  • tax relief
  • a measure of protection (diversification)
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16
Q

What are income tax incentives for VCTs? (3)

A
  • Dividends are exempt from income tax
  • Income tax relief of 30%
  • only for newly issued ordinary shares
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17
Q

How long before tax relief from VCTs can not be clawed back?

A

Five years

18
Q

What are the risks in investing in VCTs? (3)

A

Liquidity - Not listed companies, hard to sell

  • Smaller companies more vulnerable to market downturns

-Might be young and inexperienced management teams

19
Q

How is CGT charged on Unit trusts and ETFs?

A
  • Gains made within are exempt from tax
  • Disposal of shares may trigger CGT liability
  • Need to exceed annual CGT exemption
  • Loss can be used to offset against gains
  • Losses can be carried forward indefinitely
20
Q

Income tax for Unit trusts and ETFs

A
  • Income paid gross
  • Tax liable if income exceeds allowance
21
Q

How is income taxed if more than 60% of a fund is invested in cash deposits and interest-bearing securities?

A

taxed as interest

22
Q

How is income taxed if less than 60% of a fund is invested in cash deposits and interest-bearing securities?

A

taxed as dividend

23
Q

What is equalisation payment? (2)

A
  • When paid for fund and dividend that hasn’t been paid out yet
  • Equalisation payment is returning the money to investor
24
Q

How does CGT work for Investment Trusts?

A
  • No CGT for internal gains
  • may be liable after disposal
  • losses can be used to offset gains
  • losses can be carried forward indefinitely
25
Q

How does income tax work for Investment Trusts? (2)

A
  • Always taxed as dividends
  • overseas dividends may be paid net of foreign withholding tax
26
Q

How does CGT work for REITs?

A
  • No CGT if 90% of profits are paid to shareholders as dividends
  • Liable to CGT on disposal
  • Losses may be offset or carried forward
27
Q

How does income tax work for REITs?

A
  • dividends taxed as rental income
28
Q

10 Hedge fund characteristics

A
  • Structure
  • Regulation
  • Investment flexibility
  • Gearing
  • Low correlation to world securities markets
  • High minimum investment
  • Liquidity
  • Cost
  • Performance related fees
  • Manager investment
29
Q

How are hedge funds structured? (3)

A
  • authorised or unregulated CISs
  • Can’t be marketed to private individuals
  • Too risky for less financially sophisticated investors
30
Q

How are hedge funds regulated? (3)

A
  • usually domiciled in offshore financial
  • i.e. Cayman Islands or Dublin
  • Subject to lighter regulatory regime
31
Q

What is the investment flexibility of hedge funds? (2)

A
  • because of lack of regulation
  • able to invest in wider range of assets
32
Q

Is gearing available for hedge funds?

A

Yes

33
Q

What is the correlation of hedge funds to world securities markets?

A

Low

34
Q

What is the minimum investment on hedge funds?

A
  • excess of £50,000
  • sometimes more than £1million
35
Q

Are hedge funds liquid? (3)

A

No

  • sometimes there are lock in periods
  • between 1 - 3 years before able to sell
36
Q

Are hedge funds costly to hold? (3)

A
  • performance related fees
  • up to 20% of net new highs
  • 2% management fee
37
Q

Do managers of hedge funds have to invest in their own fund?

A

Yes

38
Q

What are the eight risks in investing in hedge funds?

A
  • Gearing
  • Settlement is over-the-counte (OTC)
  • currency risk
  • dealing delays
  • illiquid investments
  • lack of visibility on portfolios
  • fraud
  • reduced governance and a lack of trustees
39
Q

What are offshore funds?

A

collective investments domiciled in an offshore financial centre

40
Q

Uses and tax benefits of offshore funds (3)

A
  • wider choice of funds than avaialble onshore
  • no tax while income is rolling up
  • postpone encashment until tax band goes down

CISI - Portfolio Construction Theory in Wealth Management (15 decks)

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