Chapter 4 - Investment Funds & Strategies

Question 1

What are split capital investment trusts?

Answer 1

They issue different share classes that appeal to different types of investors

Question 2

Types of share class that split capital IT’s can issue

Answer 2

Income shares (entitled to all income)
Zero dividend preference shares (pay no income but provide fixed rate of capital growth until trust is wound up)
Capital shares (receive no income but entitled to all capital in the trust, but are last in queue upon winding up of the trust, highest risk of the three)

Question 3

To be exempt from corporation tax, what must REIT’s do? (3)

Answer 3

1. At least 75% of the companies gross profits must come from ring fenced business
2. Interest in borrowing has to be covered at least 125% by its rental profits
3. REIT’s must also distribute at least 90% of the net rental income from the tax exempt element

Question 4

What are the max investment, income tax relief and min holding period for a) VCT b) EIS c) SEIS?

Answer 4

VCT - £200,000, 30% income tax relief and 5 years
EIS - £1,000,000, 30% and 2 years
SEIS - £100,000, 50% and 2 years

Question 5

When hedge funds borrow securities from lenders to cover their short positions, this is known as:

Answer 5

Stock lending

Question 6

What is the main risk when investing in exchange traded funds which use synthetic replication?

Answer 6

Counterparty risk

Question 7

How do the pricing structures of unit trusts and open-ended investment companies (OEICs) compare?

Answer 7

OEIC’s have single pricing and unit trusts can have single or dual pricing

Question 8

What is the formula for NAV premium/discount for an IT?

Answer 8

NAV premium/discount = share price/NAV -1