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CISI Introduction to Securities and Investments 2025 > Chapter 7 - Investment Funds > Flashcards

Chapter 7 - Investment Funds Flashcards

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SIE Exam flashcards
1
Q

What is the Asset management sector responsible for?

A

Management of retail funds (Totaling £10 tn)

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2
Q

What is the role of the IA

Investment Association

A
  1. They represent the whole industry, principly to goverments and regulators as well as to the press and public.
  2. To promote high standards

The trade body for the UK-Based Asset Management Industry.

Covers a range of products incl: Investment Funds, Pensions, ISAs.

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3
Q

Before making any investments, what questions should investors ask themselves?

A
  • What am I investing for?
  • What amount of money will I need?
  • Over what timescale do I want investment returns?
  • What risks am I prepared to take?
  • What types of assets are right for me?
  • How can I avoid risk?
  • What mix of investments is best suited to my objectives and attitude to risk.
  • Do I need income now or later?
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4
Q

What is direct investment

A

When an investor personally buys shares in a company

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5
Q

What is indirect investment

A

When shares in a company are bought when you invest in a fund

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6
Q

What are collective investment schemes (CISs) and what are their benefits?

A

A pool of investors with the aim of persuing a common investment objective.

Benefits:
1. Economies of scale
2. Diversification
3. Access to professional management (really the main benefit)
4. Access to geographical markets, asset classes or investment strategies which might otherwise be unaccessable to the individual investor
5. Regulatory oversight
6. Tax Deferral

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7
Q

What fees can you expect to see in CISs?

A

Management Fees
Redemption Fees (exit charges)
Subscription Fees (entry fees / initial charges)

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8
Q

What do the fees for Collective Investment cover intenally?

A
  • Fund manager’s salary’s.
  • Technology.
  • Research.
  • Their dealing.
  • Settlement and risk management systems.
  • To provide a profit.
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9
Q

What is Active Management?

A

Active management seeks to outperform a predetermined benchmark over a specified time period though a range of fundamental and technical analysis to help forcast and predict future events. These have higher management fees compared to passive funds.

Hedge funds investment styles would also be under active management.

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10
Q

What is top-down and bottom-up approach?

A

TD = manager focuses on economic and industry trends rather than prospects of particular companies.

BU = analysis of company’s net assets, future profitability and cash flow, and other company-specific indicators, is a priority.

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11
Q

What are four bottom-up investment styles?

A
  1. Growth Investing
  2. Value Investing
  3. Momentum Investing
  4. Contrarian Investing
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12
Q

What is growth investing?

A

Picking the shares of companies that present opportunities to grow significantly in the long term

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13
Q

What is value investing?

A

picking the shares of companies that are undervalued relative to their present and future profits or cash flows

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14
Q

What is momentum investing?

A

picking the shares whose share price is rising on the basis that this rise will continue

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15
Q

What is contrarian investing?

A

The flip side of momentum investing, which involves picking shares that are out of favour and may have ‘hidden’ value

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16
Q

What is passive management?

Often called index tracker funds

A
  1. A portfolio constructed to mimic a recogonised index (also called indexation).
  2. Management dont forcasst events or outperform the broader market
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17
Q

What is the benifit of using passive management for a fund?

A

Relatively few active portfolio managers consistently outperform benchmark equity indices.
* The 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.

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18
Q

What are the disadvantages for using passive management?

A
  • Performance is affected by the need to manage cash flows, rebalance the portfolio to replicate 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.
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19
Q

What is it called when you use a combination of both passive and active management?

A

Core-Satellite Management (70-80% indexed thus core with fine tuning).
Smart Beta (additonal factors taken in, instead of just index tracking).

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20
Q

What two entities classify investment funds?

A

Investment Association (IA) - For UK, authorised, open-ended companies
Association of Investment Companies (AIC) - For closed-ended companies (investment trusts)

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21
Q

How does the Investment Association clasify over 4000 funds?

A

**Mainly in two catagories: **

  • Income
  • Capital Growth.

There are some specialist and other catagories:

  • Capital protection
  • Specialist funds
  • Volatilitymanaged
  • Absolute/target return
  • and Unclassified.

It then further gets catagorised into sectors containing region and industry (in relation to simialr stocks).

This is used to compare similar products for investors and advisors.

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22
Q

What is UCITS?

Undertakings for Collective Investments in Transferable Securities

A
  • 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).
  • It creates a framework for cross border sales of investment funds through the EU aimed to reduce costs, improve customer choice and ensure fair play.
    *
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23
Q

What does NURS stand for?

A

‘Non-UCITS Retail Schemes’

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24
Q

What does it mean to be classed as NURS

A

They have been deemed sutiable for retail investors by the UK Regulators.

This allows for more range of investment oppertunity incl direct investment in propety.

They however are deemed unsuitable for UCITS as they dont meet thier higher bar for rules/regulation

25
Q

What is a Unit Trust?

A
  • A Collective Investment Scheme (CIS) in the form of a trust in which the trustee is the legal owner of the underlying assets and the unit holders are the beneficial owners.
  • A diversified portfolio with eitehr stocks, bonds or a mix.
  • Often described as open-ended as the fund can grow or shrink depdning on investor demands.
  • Each investors buys/sells units priced differently based on action (this is called dual pricing).

Authorised Unit Trusts (AUTs), the trustees are companies subject to special regulation

26
Q

What is the role of a unit trust manager?

A
  • Decide what investments are included in the unit trust within its rules and regulations to meet the investment objective (e.g. what to buy / sell)
  • Responsible for pricing units to sell to or buy back from investors.
  • Calculate Daily Pricing of Units based on the NAV (they cover dealing expensise with the spread between buying and selling)

Note that they can commonly outsource the investment decision making.

27
Q

What is the role of a trustee in a unit trust?

A
  • Be the legal owner of the assets
  • Hold the assets for the benefit of the underlying unit holders
  • To police the manager of the unit trust ensuring regulations and the trust deed are followed.

This will usually be an AUT which encompases Banks or an Insurance company. They will be heavily regulated financial institutions e.g. BNY Mellon, Citigroup, JP Morgan, Royal Bank of Scotland,State Street etc.

28
Q

What’s the difference between a unit trust and an OEIC

A
  • A unit trust is goverend by Trust Law and the OEIC is governed by Company Law
  • Unit Trusts tend to have a buy and a sell price which are different. OEICs have one price per share.
29
Q

Who would be the trustees for an Authorised Unit Trusts (AUTs)?

A

A trustee for a unit trust is a company and is subject to special regulation - all part of global banking groups.

They will be heavily regulated financial institutions e.g. BNY Mellon, Citigroup, JP Morgan, Royal Bank of Scotland,State Street etc

30
Q

What is an Open-Ended Investment Company

A
  • A type of Collective Investment Scheme. It is a more modern equivalent to a unit trust.
  • They are known as investment companies with variable capital (ICVCs) by the FCA.
  • and Société d’Investissement à Capital Variable (SICAV) in Western Europe.
  • The fund manager is called a Authorised Corporate Director (these are called Authorised Unit Trust Manager in a unit trust)
  • Like a unit trust they have a trustee but it is called a depository.
  • It is single priced (unlike a unit trust with dual pricing)

Typically setup in Ireland or Luxembourg for marketing to Europe or further.

31
Q

What is an ICVC?

A

Investment Companies with Variable Capital

OEIC

32
Q

How do OEICs differ from conventional companies?

A

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.

33
Q

What is a dilution levy?

A

An additonal fee when buying or selling to recover dealing fees for large transaction as they can affect the unit price for all investors. This aims to minimise that by charging the fees to the individuals causing this transaciton as to not affect all other investors by it reducing the nav further than needed.

In dual pricing this is covered by spead. In single pricing we need to use a levy

34
Q

What costs can a fund managers charge to the fund?

A
  • Annual Management Costs
  • Inital Charge for the Investment
  • Brokers’ commission for trades undertaken
  • Legal and audit fees, and
  • Fees for specialist taxation advice.

UCITS requires funds to publish an ongoing charge figure (OCF) and quote this in the Key investor information document (KIID)

35
Q

What is contained in the KIID?

Key Investor Information Document

A

It includes all types of expenses incurred by the UCITS:

  • Costs of the UCITS management company,
  • The depositary
  • The custodian and
  • Any investment adviser.
  • Outsourced services
  • Registration fees,
  • Regulatory and audit fees
  • Payments to legal and professional advisers.

However, it does not include any initial or exit charges or any performance fees

36
Q

Where is the register of the shareholders maintained in an OEIC?

A

By the Authorised Corporate Director (ACD).

37
Q

What is a fund supermarket?

A

A platform or organisation that specialise in offering OEICS from different providers.

38
Q

What is the settlement time (in days) for OEICs?

A

T+4 (Trade date + 4)

39
Q

Are investment trusts, a company or a trust and what are some features of it?

A
  • Company (It is a listed company run by a board of directors)
  • They can issue bonds, take loans
  • Can issue ordinary and preference shares
  • Share amount are fixed for a number of years (hence these are closed-ended)

Also known as an investment trust company (ITC).

40
Q

Where are investment Trusts bought?

A

On a stock exchange

41
Q

What is Gearing

A

When an Investment Trust take out loans or issue bonds (due to being PLC /Listed company)

This can improve returns but also increase losses (basically a form of leveraging)

42
Q

What is a REIT Fund?

A

Real Estate Investment Trust.
* Investment companies that pool investors’ funds to invest in commercial and, possibly, residential property.
* Under the rules, a REIT pays no tax on property income or capital gains on property disposals, providing that at least 90% of that income (after expenses) is distributed to shareholders each year.
* REITs may also be held in both individual savings accounts (ISAs) and self-invested personal pension schemes (SIPPs).
* Allow for retail investors to invest in commercial property.
* Closed Ended, Quoted on LSE and other exchanges
* They may have a date the trust willl hbe “wound up” and the assets will be retruned to the shareholders

43
Q

What terms are used for the price/share of a REIT or Investment Trust that is trading away from its nominal

In relation to if it is trading above or below its NAV

A
  • When the investment trust share price is above the NAV, it is said to be trading at a premium.
  • When the investment trust share price is below the NAV, it is said to be trading at a discount.

They generally trade at a discount.

44
Q

What is an ETF?

Exchange Traded Fund

A
  • An open-ended investment fund usually designed to track a particular index and is tradable on a stock market.
  • Uses a passive investment management and mainly uses market cap weighted indicies
  • Their price is determined by price and demand. (they may trade at a premium or discount but difference is minimal)
  • Unlike other stocks on the LSE, there are no Stamp Duty Fees on ETFs

in open-ended the units increase and decrease depending on supply and demand of the investors

45
Q

What are the 3 types of index tracking in an ETF? (not how an index is weighted)

A
  1. Full Replication (most expensive, each stock is the same as the index’s at any given time, sutiable for large portfolios)
  2. Stratified Sampling (less expensive, samples stock data from index to try maintain same weightings)
  3. Optimisation (uses a sophisticated computer modelling technique to find a representative
    sample of those securities which mimic the broad characteristics of the index tracked)
46
Q

What is Synthetic Replication in an ETF and what is its Pros and Cons?

A

It is when a fund manager enters into a swap (OTC derivative) with a market counter party to outsource the responsibility of tracking the index.
Pros: This reduces cost on the fund.
Cons: Counterparty risk (Swap provider may fail to meet obligations)

47
Q

What are the 7 features of a hedge fund?

A
  • Structure - Unauthorised thus not marketed to private individuals/retail investors
  • High investment Entry Levels - Min subscription amount 500k - 1mn
  • Investment Flexibility - Lack of regulation allow for investments in anything subject to their consitutional docs)
  • Gearing - they can borrw funds and use deriviatives
  • Prime Broker - they can borrow, buy, sell and safeguard assets all through one broker called the prime broker
  • Liquidity - They have lock-in periods (both hard and soft lock-ins).
  • Cost - Performance related fees (up to 20% or more of the net new highs, called high water mark)

The prime broker is usually an investment bank

48
Q

What is a Private Equity firm and where do they get thier money from?

A

They buy shares in unlisted companies and hope to sell the shares back to management/sell to other investors at a gain, have a trade sale happen or have the company list on the stock market to make a return.
Most the capital comes from large investment institutions

Trade sale - the sale of company shares to another firm

49
Q

How can the pooling of funds via a collective investment scheme (CIS) benefit a retail investor?

Exam Question

A

Increased capital
availability to markets globally
Diversification
Professionally managed
Tax efficient investing
Regulated

50
Q

What is an investment management approach that seeks to produce returns in line with an
index known as?

Exam Question

A

Passive Management

51
Q

Why would a European investment fund seek Undertakings for Collective Investment in
Transferable Securities (UCITS) status?

Exam Question

A
52
Q

How does the trading and settlement of an authorised unit trust (AUT) differ from that of an
exchange-traded fund (ETF)?

Exam Question

A

AUTs tend to be dual-prices. Not on a stock exchange.

ETFS tend to be single-priced. Traded on srock exchange, is a company (has board of directors)

53
Q

How do open-ended investment companies (OEICs) differ from conventional companies?

Exam Question

A
54
Q

For which type of collective investment vehicle would the fund manager most likely quote bid
and offer prices?

Exam Question

A

Traditionally Authorised Unit Trusts (AUTs) but an OEIC can also use dual pricing although they prefer single pricing.

55
Q

What are some of the principal ways in which investment trusts differ from AUTs and OEICs?

Exam Question

A
56
Q

What is an open-ended type of investment vehicle that is traded on a stock exchange?

Exam Question

A

ETF

57
Q

What type of investment vehicle makes extensive use of short positions?

Exam Question

A

Hedge Funds

58
Q

What is the main way that private equity firms raise capital?

Exam Question

A

Through sound business analysis so that investment banks will entrust their money with the firm.

CISI Introduction to Securities and Investments 2025 (12 decks)

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