Chapter 7: Investment Funds Flashcards

Question

What is a benefit of employing indexation?

Answer 1

* Relatively dew active portfolio managers consistently outperform benchmark equity indices. * Fund's charges will typically be significantly lower than actively managed funds. * Once set up, passive portfolios are generally less expensive to run than active portfolios, given a lower ratio of staff to funds managed and lower portfolio turnover.

Answer 2

* Performance is affected by the need to manage cash flows, rebalance the portfolio to replicated changes in index-constituent weightings, and adjust the portfolio for stocks coming into, and falling out of, the index. This can lead to tracking error when the performance does not match that of the underlying index. * Most indices reflect the effect of the value of dividends from constituent equities on the ex-dividend date. * Indexed portfolios may not meet all of an investor's objectives. * Indexed portfolios follow the index down in bear markets.

Answer 3

Investment strategies that incorporate both active and passive investment styles.

Answer 4

By indexing, say, 70-80% of the portfolio's value (the 'core'), so as to minimise the risk of under performance, and then fine-tuning this by investing the remainder a number of specialist actively managed funds or individual securities. This is the 'satellite' element of the fund.

Answer 5

Instead of tracking an index, these funds take into account other factors, such as value or growth, when creating an index that they will track. It can be regarded as a mix of active and passive - follows an index, but active as it considers alternative factors.

Answer 6

* IA for UK authorised open-ended funds industry (maintains system for classifying funds). * Association of Investment Companies (AIC) occupies a similar role for investment trusts (close-ended companies).

Answer 7

Most sectors categorised between those designed to provide: * 'income' * 'growth' Other funds that don't fall under these headings are in other categories: * capital protection * specialist funds * volatility-managed * absolute/target return * unclassified

Answer 8

* Similar asset categories * Same stock market sectors * Same geographical region

Answer 9

Aimed at needs of investor who has a desire to compare funds on a like-for-like basis. Sector classification provides groups of similar funds whose performance can be readily compared by an investor and their adviser.

Answer 10

A series of EU regulations ('directives') that were originally designed to facilitate the promotion of funds to retail investors across the EU and European Economic Area (EEA).

Answer 11

Requirements of UCITS, no matter which EU country it's established in.

Answer 12

Create a framework for cross-border sales of investment funds throughout the EU, which would allow an investment fund to be sold throughout the EU, subject to regulation by its home country regulator. - rationale being allowing funds to be sold across borders would reduce costs involved and improve customer choice, while ensuring a level playing field through common standards of investor protection.

Answer 13

Establish a fund in the UK as a UCITS fund and then sell the fund across Europe. Mean many UK fund management groups have set up subsidiaries in Luxembourg, Ireland and other countries so that they can operate from there. Equally EEA-based funds will encounter difficulties selling funds to UK.

Answer 14

Permit EEA UCITS funds to continue to be marketed to retail investors during a temporary period before they require them to apply for recognition. But, the sheer numbers involved makes individual recognition of funds impractical, so HM Treasury has introduced an overseas fund regime which allows the gov't to recognise another country's regime for funds which will then enable funds from those countries to access the UK market.

Answer 15

'Non-UCITS Retail Schemes'

Answer 16

These funds are deemed by UK regulator to be suitable for retail investors, but don't meet more prescriptive rules of European UCITS Directive. They allow greater range of investment opportunities including direct investment in property. Many fund of funds adopted NURS as this allows the use of much wider range if underlying investments.

Answer 17

UT is a CIS in the form of a trust in which the trustee is the legal owner of the underlying assets and the unitholders are the beneficial owners. It may be authorised and unauthorised.

Answer 18

- Investors pay money into the trust in exchange for units. - Money invested in a diversified portfolio of assets, usually consisting of shares or bonds or a mix of the 2. - If the diversified portfolio increases in value, the value of units will increase (also possible that portfolio might fall in value, in which case the units will decrease in value).

Answer 19

The trust can grow as more investors buy into the fund, or shrink as investors sell units back to the fund and they're either cancelled or reissued to new investors.

Answer 20

Decide, within rules of the trust and various regulations, which investments are included within the unit trust to meet its investment objectives. Includes deciding what to buy and when to buy it, as well as what to sell and when to sell it. The unit trust manager may (and commonly does) outsource this decision-making to a separate investment manager. - Provides market for units by dealing with investors who want to buy or sell units. - Carries out daily pricing of units, which is based on the Net Asset Value (NAV) of underlying constituents.

Answer 21

Deals with investors who want to but or sell units. Carries out daily pricing of units, based on the Net Asset Value (NAV) of underlying constituents.

Answer 22

Legal owner of assets in the trust, holding the assets for the benefit of the underlying unit holders.

Answer 23

By monitoring actions of unit trust managers. Whenever new units are created for a trust, they are created by the trustee. Trustees are organisations that unit holders can trust with their assets.

Answer 24

Companies subject to special regulation - all part of global banking groups.

Answer 25

Open-ended investment company - a CIS structured as a company, with the investors holding shares.

Answer 26

Investment companies with variable capital (ICVCs).

Answer 27

An investment company with variable capital.

Answer 28

Societe d'Investissement a Capital Variable (SICAV)

Answer 29

Invests shareholders' money in a diversified pool of investments.

Answer 30

Because they are established under special legislation and not the Companies Act. They're not subject to share repurchase restrictions, create new shares and redeem existing ones according to investor demand, unlike ordinary companies. This means they're open ended in nature, just like unit trusts.

Answer 31

Authorised Corporate Director (ACD) and a depository are appointed.

Answer 32

Responsible for the day-to-day management of the fund, including managing the investments, valuing and pricing the fund, and dealing with investors. It may undertake these activities itself or delegate them to specialist third parties. It's subject to the sam e requirements as the manager of an AUT.

Answer 33

By an independent depository, responsible for looking after the investments on behalf of the OEIC shareholders and overseeing the activities of the ACD. The depository occupies a similar role to that of the trustee of an AUT and is subject to the same regulatory requirements.

Answer 34

By the ACD.

Answer 35

Based on the value of the fund's flexibility to quote prices, which can be either single-priced or dual-priced (although this decision must be taken at the outset and manager cannot switch between the two as and when it suits).

Answer 36

Refers to the use of mid-market prices of the underlying assets to produce a single price.

Answer 37

Involves using marker's bid and offer prices of the underlying assets to produce separate prices for buying and selling of shares/units in the fund.

Answer 38

AUTs use Dual-pricing. OEICs use Single-pricing.

Answer 39

Yes - whichever is chosen must be disclosed in the prospectus.

Answer 40

With its underlying investments valued based on their mid-market value, this method of pricing doesn't provide the ability to recoup dealing expenses and commissions within the spread. Therefore, where necessary such costs are recouped by applying a separate charge (dilution levy) on purchases or redemptions, or by swinging the daily price to a dual-priced basis depending on the ratio of buyers and sellers on any day. The initial charge will be charged separately, whichever pricing method is used.

Answer 41

The max price at which the fund manager is able to sell new units prescribed by the FCA. Under dual pricing, it comprises of the creation price + he fund manager's initial charge.

Answer 42

Price the manager must pay to the trustee to create new units, which broadly consists of the value of the underlying investments and an allowance for dealing costs.

Answer 43

The price at which the fund manager will repurchase units.

Answer 44

Minimum selling price, or the price received from the fund by the manager when they cancel the units, using as its starting point the value of the portfolio at bid prices. The manager has flexibility about the price that is set, subject to it being no less than the minimum selling price.

Answer 45

* Initial charge made for the investment * Annual Management Charge (AMC) - applied to cover the ongoing costs of the management and administration of the fund.

Answer 46

* Brokers' commission for trades undertaken * Legal and audit fees * Fees for specialist taxation advice

Answer 47

Because they are incurred in the necessary management of the fund, such as any audit costs for the fund. Managers of funds are entitled (under terms of their management agreements) to charge certain other costs to the fund.