Chapter 7 - Investment funds

Question 1

value investing

Answer 1

• investment stratergy that seeks to identify stocks that are trading at less than their intrinsic value
• market overreacts to good and bad news, briefly disregarding the long-term fundementals

Question 2

tracking error

types of stratergies and their effect

Answer 2

• standard deviation of the difference between the portfolio and benchamrk index return
• passive - replicate index returns, thus minimising tracking error
• index funds - expected to mirror retrurns minus the expenses, ‘managememnt expense ratio’

Question 3

open-ended investment companies (OEIC)

Answer 3

legal structure

• collective invetsment scheme, underlying structure is a company
• not established under companies acts - allows for share capital to expand and contract to meet investor demand

management

• authorised corporate director (ACD), day to day management
• depository, safeguard investments for shareholders and oversee actvities (i.e. trustee)

authorisation and supervision

• authorisation by FCA
• supervision by depositiory and FCA

pricing and valauation

• ACD, choice of single or dual pricing, most choose single
• single price is valuing the portfolio using the mid-market price

dealing and settlement

• ACD sells (and buys back shares), creating a market
• different classes of shares are possible
• initial is charged sepertaley, not included in the price
• diluation levy may be charged for deals above a certain size

Question 4

closed-ended funds (investment trusts)

Answer 4

legal structure

• structured as normal companies with a bord of directors and shareholders
• fixed capital base. must issue new shares for increases to meet investor demand
• new funds must have a new trust

management

• board manages the company - often they appoint third parties to undertake critical activities
• segregartion of assets from their care is achieved through investment managers and custdoians
• can borrow funds (bonds or banks) to gear investments

authorisation and supervision

• company, requires approval from the UK listing authority. plus, various disclosure requirements
• must be listed, requires approval from stock exchange
• investment trusts are exempt from CGT once qualified

pricing and valuation

• values it’s portfolio daily and notifies its NAV to the stock market
• can issue other types of shares, such as prefrence, zero-coupon and warrants

dealing and settlement

• shares are bought and sold on the LSE, and they also settle in the same way. OEICs require seperate administration
• price depends on supply and demand, rather than underlying NAV. price may be at a premium or discount.
• for example, NAV of 250p and is trading at 225p, means it’s trading at a 10% discount. i.e. ((250 - 225) + 250)
• buy back schemes, shares are repurchased when they exceed a certain discount (often 15%)

Question 5

unregulated collective investment schemes (UCIS) / NMIPs)

Answer 5

• the fund manager has a greater opportunity to pursue new or unorthodox strategies and investments.
• the FSCS does not cover them
• regarded as having a high degree of volatility, illiquidity or both