Chapter 3 Flashcards
For Funds, how do you calculate NAV?
assets owned by the fund company - liabilities
For funds, how do you calculate NAV per share?
(assets - liabilities)/shares or units in issue
What are the four main grouping of funds?
- Growth
- Income
- Capital protection
- Specialist funds
What securities are in growth funds?
Predominantly equity-like in character
What securities are in income funds?
FI, equity and mixed asset classes
What securities are in capital protection funds? (3)
- money markets
- short-term money markets
- protected funds
What securities are inlcuded in specialist funds?
↩️🏠🌾🛢️🏦🏥🌉💻
- absolute return
- property
- commodities
- natural resources
- Financial/Financial innovation
- Healthcare
- Infrastructure
- Technology
What are the 6 main risks in fund investment?
- Market
- Liquidity
- Credit
- Inflation
- Interest rate
- Currency risk
- Country risk
What are the 7 operational issues of fund investment?
- Tax
- Availability of pooled funds
- Operational efficiency
- Risk of default
- Other risks i.e. fraud
- Governance and transparency
- Switching (entry and exit fees)
For preference shares, what are income shares? (2)
- Pay regular dividends from surplus income
- have a predetermined maturity value
For preference shares, what are capital shares? (3)
- do not pay dividends
- receive capital remaining
- when preference and income shareholders have been paid
For preference shares, what are convertible preference shares?
can convert into ordinary shares
For preference shares, what are zero dividend preference (ZDP) shares? (2)
- receive no dividends
- return via difference between what was paid and what they receive at a fixed future date
Why are investors incentivised to invest on VCTs? (2)
to provide capital to smaller, start-up companies
hard to find funding for growth
What are the incentives for investors to invest in VCTs? (2)
- tax relief
- a measure of protection (diversification)
What are income tax incentives for VCTs? (3)
- Dividends are exempt from income tax
- Income tax relief of 30%
- only for newly issued ordinary shares
How long before tax relief from VCTs can not be clawed back?
Five years
What are the risks in investing in VCTs? (3)
Liquidity - Not listed companies, hard to sell
- Smaller companies more vulnerable to market downturns
-Might be young and inexperienced management teams
How is CGT charged on Unit trusts and ETFs?
- 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
Income tax for Unit trusts and ETFs
- Income paid gross
- Tax liable if income exceeds allowance
How is income taxed if more than 60% of a fund is invested in cash deposits and interest-bearing securities?
taxed as interest
How is income taxed if less than 60% of a fund is invested in cash deposits and interest-bearing securities?
taxed as dividend
What is equalisation payment? (2)
- When paid for fund and dividend that hasn’t been paid out yet
- Equalisation payment is returning the money to investor
How does CGT work for Investment Trusts?
- No CGT for internal gains
- may be liable after disposal
- losses can be used to offset gains
- losses can be carried forward indefinitely
How does income tax work for Investment Trusts? (2)
- Always taxed as dividends
- overseas dividends may be paid net of foreign withholding tax
How does CGT work for REITs?
- No CGT if 90% of profits are paid to shareholders as dividends
- Liable to CGT on disposal
- Losses may be offset or carried forward
How does income tax work for REITs?
- dividends taxed as rental income
10 Hedge fund characteristics
- Structure
- Regulation
- Investment flexibility
- Gearing
- Low correlation to world securities markets
- High minimum investment
- Liquidity
- Cost
- Performance related fees
- Manager investment
How are hedge funds structured? (3)
- authorised or unregulated CISs
- Can’t be marketed to private individuals
- Too risky for less financially sophisticated investors
How are hedge funds regulated? (3)
- usually domiciled in offshore financial
- i.e. Cayman Islands or Dublin
- Subject to lighter regulatory regime
What is the investment flexibility of hedge funds? (2)
- because of lack of regulation
- able to invest in wider range of assets
Is gearing available for hedge funds?
Yes
What is the correlation of hedge funds to world securities markets?
Low
What is the minimum investment on hedge funds?
- excess of £50,000
- sometimes more than £1million
Are hedge funds liquid? (3)
No
- sometimes there are lock in periods
- between 1 - 3 years before able to sell
Are hedge funds costly to hold? (3)
- performance related fees
- up to 20% of net new highs
- 2% management fee
Do managers of hedge funds have to invest in their own fund?
Yes
What are the eight risks in investing in hedge funds?
- 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
What are offshore funds?
collective investments domiciled in an offshore financial centre
Uses and tax benefits of offshore funds (3)
- wider choice of funds than avaialble onshore
- no tax while income is rolling up
- postpone encashment until tax band goes down
