CHAPTER 7 COLLECTIVE INVESTMENTS Flashcards

Question

Closed Ended Funds/Investment Trusts What is diluted NAV? How do you calculate it?

Answer 1

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**

Answer 2

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.

Answer 3

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).

Answer 4

**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.**

Answer 5

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.

Answer 6

**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.

Answer 7

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.

Answer 8

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

Answer 9

* 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

Answer 10

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

Answer 11

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**

Answer 12

is used to assess the risk adjusted performance of active portfolio mgrs - skill **IR = Rp - Rb divided by tracking error**

Answer 13

* 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

Answer 14

* Can be expected to fall within one standard deviation 68% of the time * 2 standard deviations 95% of the time

Answer 15

* 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.

Answer 16

* 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