Chapter 7 - investment funds Flashcards
what is an investment fund? how are they managed? what is the purpose?
Investment funds = vehicles that pool capital from numerous investors to collectively invest in diversified portfolios of securities
Managed = fund managers
Purpose = achieve capital appreciation, generate income
what do investors typically consider?
- purpose of investment
- timescale
- risk
- types of assets
what is a direct investment and what is an indirect investment
direct = when an individual invests directly into that company
indirect = individual buys a stake in an investment fund
what are the advantages and disadvantages of investing in collective investment schemes
advantages
- economies of scale
- diversification
- access to geographical markets
- less risk as not individual company
- skills of fund managers
disadvantages
- fund managers may charge fees
- lack of control
what does active management mean? what does top down and bottom up mean?
seeks to outperform a benchmark
top down - focuses on economic and industry trends rather than the company
bottom up = analysis of the company, such as future profits and company growth
what investment styles are considered in bottom up approach
growth investing
value investing
momentum investing
contrarian investing
what is passive management what is it often described as?
instead of trying to outperform, passive management focuses on replicating the performance of a benchmark.
often described as index-tracking or indexation
advantages and disadvantages of passive management
advantages
- outperforming indices is rare
- fund charges typically lower
- passive portfolios are less expensive to run
disadvantages
- performance is affected by the need to manage cash flows
- may not meet investors objectives
- less high returns and less flexibility
what is the term called when active and passive management is mixed
= core-satellite management
smart beta = tracks an index but considers alternative factors
what is the role of investment association and the classification system
IA = trade body for UK authorized open-ended funds
classified systems = usually income or growth, but others are: capital protection, specialist funds, volatility managed, target return, unclassified
What is the role of Association of investment and companies
Occupies a similar role for investment trusts (closed-ended)
what is a collective investment in transferable securities
regulatory framework in European Union that allows for cross-border distribution of investment funds, allowing investments to be sold throughout the EU.
After Brexit, how has the UK established a fund to be sold throughout the EU
UK fund managers have set up subsidiaries in Luxenberg, Ireland and other countries
Purpose of UCITS (undertakings for collective investment transferable schemes)
- reduce costs involved, improve customer choice, investor protection
What are non-UCITs retail schemes (NURS), purpose and features
Investment funds in the UK that do not fall under the UCIT framework but are still available to retail investors.
Purpose - provide investment opportunities that are not covered by UCITs framework and offer retail investors access to a broader range of asset classes and investment strategies.
features - flexibility, regulation by FCA who ensure investors protection
what is a unit trust?
They pool money from multiple investors to invest in a diversified portfolio of assets. Described as open-ended because the trust can grow as more investors invest in the fund, or shrink if they pull out.
What is the role of a unit trust manager?
decide within the rules of the trust and the various regulations which investments are suited to meet objectives, deciding what to buy/sell. ALSO DEAL WITH PRICING of units.
role of the trustee
legal owner of the assets in the trust and they hold the assets for benefit of unitholder. They must protect the investors.
what is the investors called in unit trusts
unit holders, are the beneficial owner.
What is the difference with authorised unit trusts?
The trustees are company subject to special regulations, they are deemed as safer.
what are open-ended investment companies?
Type of investment fund where the number of shares can be continuously created or redeemed based on investor demand, allowing the fund to grow or shrink.
what is the structure of OEICS
Required to have an authorised corporate director (CD), who is responsible for day-to-day management, including valuing and pricing. they also maintain the register of shareholders.
ALSO required to have an independent depositary, who is responsible for looking after investments on behalf of the OEIC shareholders and overseeing activities of ACD.
how are AUTs and OEIC bought and sold
based on the value of the funds underlying investments, also called Net asset Value
what is single pricing
same price is used for both buying and selling based on the mid-market price (average value) to produce single price
what is dual-pricing
involves using the markets bid and offer price of the underlying asset to produce separate prices when buying/selling
what has AUTS and OEIC typically used to price
AUTs typically used dual-pricing, OEIC typically used single pricing, but whichever is chosen it must be disclosed.
what is the issue with single-priced
Because it is based on average prices, it does not provide ability to recoup dealing expenses, such as costs of funds/transaction costs. To get past this, fund managers apply extra costs, known as dilution levy
what are typical charges associated with Unit trusts and OEIC
initial charges, AMC, legal audit fees, broker commission, fees for taxation
what are UCITs required to publish with charges? and other companies?
they are required to publish ongoing charge figures (OCF) and quote this in key investor information document (KIID). This includes all expenses costs, but does not include initial/exit and performance fees.
other companies = total expense ratio
what are the ways investors can buy/sell units in a number of ways
- directly with fund managers, telephone, internet, post
- through Brokers or financial advisors
- fund supermarket or platform
essentially = always bought from FM
what are fund supermarkets or platforms
organisations that specialises in offering investors easy access to a range of unit trusts and OEIC, which offer valuations, portfolio planning
what is settlement in OIEC and AUT
Takes place directly with each fund group, who will record ownership of relevant number of units or shares in fund which have been registered. If the investor decides to sell, the FM has 4 days to settle this trade. Since 2009 managers have been able to accepted instructions on phone or internet.
what is the system platform used with fund management groups
EMX - traditionally, used to enter customer orders, but was taken over by Euroclear UK and international, which is a company that owns CREST, and it now has an automated straight through platform for fund dealing and settlement.
what is an investment trust
A company, commonly referred to as an investment trust company, which has a director and shareholder, and is different from AUT and OEICs as the shares remain fixed so close-ended.
what is a real-estate investment trust REIT? its features (tax), how is it held
Investment company pools investors money into commercial or residential property and is close-ended and traded on LSE
features - no more double taxation (previously investors would have to pay corporation, income, and capital gains tax, but it now no property income/disposable or capital gains tax if 90% paid to shareholders.
form -It is held in individual savings accounts and self-invested pension funds.
It provides diversified, no liquidity risk as not holding actual property.
what does gearing mean in terms of investment trusts
Amount of money borrowed to invest into securities. This is unlike AUT and OEIC
How are investment companies priced?
unlike AUT and OEIC, these are priced on market demand. If the investment share price is above the NAV, it is a premium. If the investment shares price is below the NAV it is a discount.
Most trades are at a discount. A smaller discount means investments truss are nearing their winding-up or going through a corporate action.
how are investment trusts usually traded
LSE, using the SETs trading system or via retail service providers
what is an exchange-traded funds and its participants
EFT = type of investment fund which has shares that are tradeable on a stock exchange and designed to track performance of an index.
participants =
Authorised Participant = usually large financial institutions, who are authorised to create/redeem ETF
EFT Sponsor = entity that creates and managers EFTs. they design the investment strategy.
Custodian = safekeeping/holds the underlying asset
Market Maker = facilities the buying/selling of EFT on Lse
What is the creation and redemption process of EFTs
Creation
- AP approaches custodians with large basket of assets (creation unit)
- creation unit is divided into individual EFT shares and sold on SE
Redemption
- if APs want to cash out they will give the EFT shares back to provider
- the provider gives AP underlying assets rather than cash
This process allows price efficiency and liquidity
What are the two ways EFTs can be tracked
Physical replication - traditional form and favoured
full replication - tracks all areas of index, it is accurate but expensive
Stratified sampling - requires a represented sample of securities from each sector. It is less expensive, but could be bias
Optimisation - uses sophisticated computer modelling techniques to find representative which mimic the index
Synthetic replication - fund managers enter into a swap (OTC derivative) with a market counterparty to exchange the returns of the index for payments
+ passes responsibilities, costs cheaper
- risk the counter-party may fail
what are the charges associated with ETF
- annual management charges
- stockbroker chargers
- difference in price brought and price sold
key points of unit trusts, OEIC, IT, ETF
only AUT are referred to as trusts, everything else is company
supervision for open-ended IC and ETF are provided by depositary
only investment trusts are close-ended
trading with unit trusts and OEIC are done by investment manager
settlement is done on CREST with IT and ETF
what is a hedge fund? the common aspects
Hedge fund is an investment fund that aims to make money in all market conditions and take use of short positions.
main aspects:
structure - not authorised, not for typical investors
investment entries = minimum usually of 50K, some being 1M
investment flexibilities = can investment in whatever
gearing - can borrow
prime broker
liquidity - usually has a “lock-in” period between 1-3 months
costs - charge performance fees
what is private equity? how do they raise capital? how can they make money?
Involves companies that are not listed on the stock exchange. Investors (firms or wealthy indiv) put money into those companies to help them grow, aiming for future profits.
They raise capital by gathering wealthy investors which is then pooled into investing into private limited companies.
Private equity firms make money by: selling shares back to management of investee company, selling shares to another investor, trade sales, company achieving stock market listing
how are OEIC and Unit trusts priced?
pricing directly links to underlying asset
what does private equity allow investors to recieve?
a direct stake in company
what are investment trusts used for?
traded on LSE, used for long-term borrowing and has fixed share capital
what fees are included in an UCIT OCF
Audit fees
what derivative is used for sythentic replication?
Swap
what is the IA high yield percentage?
50%
what fund charges performance related fees?
Hedge funds
why are hedge funds used?
to reduce market risk
