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RO2 > CHAPTER 7 COLLECTIVE INVESTMENTS > Flashcards

CHAPTER 7 COLLECTIVE INVESTMENTS Flashcards

1
Q

Sectors

What are the four high level Investment Association Sectors?

A

Income
Growth
Capital Protection
Specialist

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2
Q

Sectors

What percentage of a funds holdings must be in a particular sector for it to be a sector fund?

A

80%

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3
Q

FCA

What are the two FCA books covering collective investments?

A

COLL - Collective investment schemes

FUND - Investment Funds

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4
Q

Approved Securities

What are the two main rules around approved securities?

A

You can invest in approved securities without any further enquiry.
At least 90% of holdings must be in approved securities

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5
Q

Approved Securities

If a security isn’t approved (i.e. from an approved market) what features must it’s marketplace have (5)?

A

Liquid
Regulated
Operating Regularly
Recognised
Open to the public

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6
Q

Diversification

Limits on UCITS funds holding equities (except index trackers)

A

Maximum investment in any equity is 10%, you can have 4 of these
Maximum investment of remaining equities is 5%
As a result the portfolio will always have at least 16 shares

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7
Q

Diversification

Gilt fund rules

A

If a fund invests at least 35% in Gilts they must hold at least 6 different stocks (i.e. types of gilt) and no more than 30% in any single stock.

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8
Q

Borrowing

What are the gearing restrictions on UCITS funds?

A

UCITS funds can only borrow up to 10% of their fund value.

Retail UCITS can only do this temporarily, non-retail can do it permanently.

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9
Q

Unauthorised Funds

Two names for unathorised funds

What are their restrictions?

A

USISSY AND UNUMPTY

Unauthorised firms are referred to as UCIS or NMPI (non-mainstream pooled investment).

They CANNOT be marketed to retail investors, but can be sold to professional investors, high net worth etc.

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10
Q

AIFMD

What is this?

Relation to UCITS.

A

Alternative Investment Fund Management Directive

It governs marketing and management of alternative investment funds (AIF).

Includes Hedge Funds, Private Equity, Real Estate

AIFs are not subject to UCITS

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11
Q

Unit Trusts

What documents governs them?

A

Trust Deed (main one)

Scheme Particulars

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12
Q

Unit Trusts

Who is responsible for:

Managing Investments
Day to day operations
Marketing
Safeguarding and holding Assets
Register of unit holders
Record of units
Distribution of income

A
  • Managing Investments - Manager
  • Day to day operations - Manager
  • Marketing - Manager
  • Safeguarding and holding Assets - Trustees
  • Register of unit holders - Trustees
  • Record of units - Manager
  • Distribution of income - Trustees
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13
Q

Units Trusts

What documentation do investors tend to receive these days instead of certificates?

What reporting must the trusts do?

A

Receive periodic statements instead of certificates (generally)

Must publish semi-annual reports

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14
Q

Unit Trust/OEIC Tax

Internal taxation

A
  • no cgt on gains within the fund
  • uk div will be franked income and pass to investor
  • interest and rental income 20%. if it pays interest rather than dividends then interest can be an expense
  • foreign tax may not be reclaimable
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15
Q

Unit Trust/OEIC Taxation

Taxation of the investor

A
  • funds with less than 60% cash will pay dividends. none tax payer will pay nothing then 8.75 / 33.75 / 39.35
  • for funds with more than 60% cash income paid as interest. personal allowance 1000, 500 high rate, 0 for additional
  • capital gains tax on disposal. 10% basic 20% higher
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16
Q

Unit Trust/OEIC Taxation

What is equalisation?

What is the tax impact?

A
  • represents a partial refund of original capital invested. includes income built up
  • it must be deducted from purchase price for cgt purposes
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17
Q

Which collective investments can go into ISAs?

A
  • Unit trusts
  • Open-ended investment companies (OEICs)
  • Investment trusts
  • Exchange-traded funds (ETFs)
  • Government bonds (gilts)
  • Corporate bonds
  • Cash savings
18
Q

What are dual and single pricing?

A

single - when buying and selling prices of units are the same
dual - when there is and offer and bid price - the difference being the ‘spread’

19
Q

Which of these items would be included in the ongoing management charge?

Initial fee
Exit fee
AMC
Performance Fees

A

AMC - This is the main component of the ongoing management charge, and it covers the day-to-day costs of running the fund, including management fees, administrative expenses, and other operating costs.
Performance fees are not typically included in the ongoing management charge, as they are charged separately and only if the fund meets certain performance targets.

The initial fee and exit fee are not included in the ongoing management charge, as they are one-time fees charged when an investor buys or sells units in the fund.

20
Q

OEICs

Who is responsible for:

Register of shareholders?
Safekeeping of assets?
Compliance with regulations?
Day to day management?
Preparing accounts?
Managing investments?

A

Register of shareholders? DEPOSITORY
Safekeeping of assets? DEPOSITORY
Compliance with regulations? BOARD OF DIRECTORS
Day to day management? INVESTMENT MANAGER
Preparing accounts? INVESTMENT MANAGER

21
Q

Dilution Levy

Which investment type uses the dilution levy?

What is it for?

Is there an alternative?

A

OEICS
To protect the other investors of large withdrawals/input
alternative to use swing pricing - to change the price of the units up or down

22
Q

Offshore Funds

What is the tax treatment of a reporting fund?

A

can be classes as a reporting fund
pay tax on income and gains…..where funds hold more than 60% cash deemed as interest

23
Q

Offshore Funds

What is the taxation of non-reporting funds?

A

income is rolled up
income and cgt charged on disposal
taxed to income 20% / 40% /45%

24
Q

Closed Ended Funds/Investment Trusts

Key differences to OEICs/Unit Trusts

A

a fixed number of shares

Pricing: The price of closed-ended funds is determined by supply and demand in the market, and can trade at a premium or discount to the underlying net asset value (NAV). In contrast, OEIC = NAV per share or unit.

Liquidity: Closed-ended funds are generally less liquid than open-ended funds, as shares can only be bought and sold on a stock exchange. This can result in wider bid-ask spreads and a higher risk of price volatility.

Management: Closed-ended funds are typically managed by an independent board of directors, whereas open-ended funds are managed by a fund manager or management company.

Gearing: Closed-ended funds can use gearing, which is the practice of borrowing money to invest in additional assets. This can magnify gains or losses, but also increase the risk of investment losses.

Dividends: Closed-ended funds can hold back some of their income to pay dividends in lean years, whereas open-ended funds must distribute all of their income to investors.

Fees: The fees charged by closed-ended funds are generally lower than those charged by open-ended funds, as they do not need to account for daily inflows and outflows of investor capital.

25
Q

Closed Ended Funds/Investment Trusts

What is diluted NAV?

How do you calculate it?

A

diluted is assuming all outstanding warrants and stock exercised
net asset value + money from warrant holders
divided by
shares in issue plus new shares to warrant holders

26
Q

Closed Ended Funds/Investment Trusts

If a fund has Net Assets of £12m and 9m shares what is the NAV?

If there are 1m outstanding warrants with a strike price of 50p, what is the diluted NAV?

A

NAV per share = Net Assets / Number of shares outstanding
NAV per share = £12m / 9m
NAV per share = £1.33

Therefore, the NAV of the fund is £1.33 per share.

If there are 1m outstanding warrants with a strike price of 50p, we need to calculate the diluted NAV by taking into account the potential conversion of the warrants. Assuming each warrant can be converted into one common share at the strike price of 50p, the fully diluted number of shares outstanding would be:

Fully Diluted Number of Shares Outstanding = Number of shares outstanding + Number of shares from exercised warrants
Fully Diluted Number of Shares Outstanding = 9m + (1m x 0.5)
Fully Diluted Number of Shares Outstanding = 9.5m

The value of the warrants would be the number of outstanding warrants multiplied by the strike price:

Value of Dilutive Securities = Number of warrants outstanding x Strike price
Value of Dilutive Securities = 1m x 50p
Value of Dilutive Securities = £0.5m

Therefore, the diluted NAV would be:

Diluted NAV per share = (Net Assets - Value of Dilutive Securities) / Fully Diluted Number of Shares Outstanding
Diluted NAV per share = (£12m - £0.5m) / 9.5m
Diluted NAV per share = £1.21

Therefore, the diluted NAV of the fund would be £1.21 per share.

27
Q

Closed Ended Funds/Investment Trusts

Regulatory Status

A

In the UK, closed-ended funds such as investment trusts are regulated by the Financial Conduct Authority (FCA) under the Financial Services and Markets Act 2000 (FSMA).

28
Q

Closed Ended Funds/Investment Trusts

What is the difference between a conventional and split-capital trust?

A

conventional investment trusts have a simpler capital structure with a single class of shares,
while split-capital trusts have a more complex structure with multiple classes of shares and may use gearing to enhance returns.

29
Q

Closed Ended Funds/Investment Trusts

What is the hurdle rate?

Is a high rate good or bad?

A

The hurdle rate is the minimum rate of return that an investment must achieve in order to be considered successful or worthwhile. In the context of closed-ended funds or investment trusts, the hurdle rate is the minimum rate of return that the fund must achieve in order to generate a positive return for investors after accounting for fees, expenses, and taxes.

30
Q

Closed Ended Funds/Investment Trusts

What are warrants and why are they used?

A

Warrants are a type of financial instrument that gives the holder the right, but not the obligation, to buy or sell a specific underlying asset at a predetermined price (the “strike price”) on or before a certain date. In the context of closed-ended funds or investment trusts, warrants are often issued as a way to raise additional capital or to provide investors with an additional opportunity for capital appreciation.

When a closed-ended fund or investment trust issues warrants, it is effectively creating a new class of shares that entitles the holder to purchase additional shares of the fund at a specified price in the future. This can provide the fund with additional capital to invest in its underlying assets, while also providing investors with an additional way to participate in the potential upside of the fund’s performance.

Warrants can also be used to provide investors with a way to hedge against potential losses or to take advantage of market opportunities. For example, an investor who is concerned about a market downturn may purchase put warrants that give them the right to sell the underlying assets of the fund at a predetermined price, effectively locking in a minimum sale price.

In summary, warrants are a financial instrument that give the holder the right to buy or sell a specific underlying asset at a predetermined price on or before a certain date. They are often used by closed-ended funds and investment trusts as a way to raise capital, provide investors with additional opportunities for capital appreciation, and hedge against potential losses or market fluctuations.

31
Q

Closed Ended Funds/Investment Trusts

Internal Taxation

Investor Taxation

Special rule

A

Closed-ended funds or investment trusts are generally taxed on their income and capital gains at the fund level, which is known as internal taxation. This means that any income or gains generated by the fund’s underlying assets are subject to tax at the corporate level, before being distributed to investors as dividends or capital gains.

Investors in closed-ended funds or investment trusts are generally subject to the same tax rules as they would be for any other investment. This means that they are taxed on any dividends or capital gains received from the fund, and may also be subject to taxes on any foreign income or gains generated by the fund’s underlying assets.

There are also special tax rules that apply to certain types of closed-ended funds or investment trusts, such as Real Estate Investment Trusts (REITs) and Venture Capital Trusts (VCTs). For example, REITs are exempt from tax on their rental income and capital gains, provided that they meet certain criteria related to their ownership and distribution of income. Similarly, VCTs are eligible for a range of tax benefits, including income tax relief on investments and exemption from capital gains tax on disposal of shares.

It is important for investors to understand the tax implications of investing in closed-ended funds or investment trusts, as well as any special tax rules that may apply to specific types of funds. This can help investors to make informed decisions about their investments and to minimize their tax liabilities over the long term.

32
Q

Talk OEICS…

A
  • Main type of open ended funds
  • legal structure - COMPANY
  • Operated by board of directors or ACD
  • Assets held by DEPOSITORY
  • Issues Shares
33
Q

Talk Investment Trusts….

A
  • collective investments that can invest in any company listed or not, venture capital and any country
  • fixed no of shares and traded on stock exchange
  • run by independent board of directors who may employ a fund manager
34
Q

ALPHA

A

Is the measurement of an investment portfolio’s performance against a certain benchmark –usually a stock market index.
Allows us to quantify value added by fund manager, measure of managers stockpiling skill

35
Q

SHARPE RATIO

A

it measures excess return for each unit of risk

return on the investment - risk free return
divided by
standard deviation of the return of the investment

36
Q

INFORMATION RATIO

A

is used to assess the risk adjusted performance of active portfolio mgrs - skill

IR = Rp - Rb
divided by
tracking error

37
Q

MODERN PORTFOLIO THEORY

A
  • risk and return go hand in hand
  • important to look at how each investment changes in price relative to the other investments
  • assumption that investors are risk adverse
  • measure is standard deviation (how much it varies from its avg return) - PAST experience
38
Q

STANDARD DEVIATION

A
  • Can be expected to fall within one standard deviation 68% of the time
  • 2 standard deviations 95% of the time
39
Q

MWR

A
  • Measures overall return on capital invested over a specific period adjusting for cash flows
  • not good for comparing portfolios as it is strongly influenced by timing of cash flows.
40
Q

TWR

A
  • Aims to eliminate the distortions caused by timings of new money
  • it is worked out by compounding all the time periods. for each period we need to work out the holding period return

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