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CISI - Portfolio Construction Theory in Wealth Management > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

What are five main phases for a fund manager in wealth management?

ADWRT

A
  • in an advisory capacity
  • develop and then deliver customised solutions to each client
  • wealth enhancement
  • risk management of wealth
  • planning for wealth transfer
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2
Q

What is included in the advisory capacity phase? (3)

A
  • understand future wealth requirements
  • develop long-term relationship
  • meeting investment objectives
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3
Q

What is included in the ‘develop and deliver customised solutions to each client’ phase? (3)

A
  • make sure wealth in the future is protected against risk elements
  • advanced financial planning
  • make sure client’s best interest are met
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4
Q

What is included in the wealth enhancement phase?

A

mitigate taxes

increase wealth from investment activities

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5
Q

What is included in the risk management of wealth phase?

A

wealth protected from expected and unexpected risks

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6
Q

What is included in the planning for wealth transfer phase?

A

ensure that heirs’ needs are met

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7
Q

Apart from ratios between asset classes, what other issues need to be considered regarding risk? (5)

A
  • the beta/duration of equities and bonds
  • exposure to systematic risk
  • liquidity
  • currencies
  • counterparty
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8
Q

How can a fund manager neutralise currency risk?

A
  • use of derivatives, including futures and swap agreements
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9
Q

Why are foreign transactions required sometimes? (4)

A
  • purchase of foreign asset
  • settlement of an international trade
  • hedging an investment
  • lock in a particular exchange rate for a future purchase
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10
Q

What are the contracts used to reduce foreign currency risk? (5)

A
  • spot contracts
  • forward contracts
  • foreign currency options
  • foreign currency futures
  • currency swaps
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11
Q

What are the liquidity constraints for funds? (2)

A
  • need for cash for unforeseen developments in the capital markets
  • i.e. when need to shorter duration and beta of portfolio
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12
Q

What is the tax status constraint for fund managers?

A

the investment portfolio and the strategt adopted must be consistent with the fund’s tax status

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13
Q

What are some legal constraints for fund managers?

A

For collective investment schemes in the UK, there are certain investments in which some funds may not be able to invest in

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14
Q

What is ethical investing?

A

incorporates data on the ethical standing, specifically, environment, social and governance (ESG) practices

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15
Q

What are the two types of clients?

A
  • discretionary
  • non-discretionary
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16
Q

What is a discretionary client?

A

gives decision making on investments to fund manager

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17
Q

What is an advisory client?

A

fund manager makes recommendation to them

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18
Q

What is an execution-only client?

A

client receives no advice

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19
Q

What is a defined benefit pension?

A

DB schemes pay a pension that is defined according to rules based on:

  • salary
  • number of years worked with a company
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20
Q

How does a DB scheme work? (4)

A
  • details vary
  • company & employee makes contribution as percent of wage
  • this is then invested
  • investment pot managed to meet the requirement to pay pensioner as per scheme rules
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21
Q

Why are DB schemes less popular for employments?

A
  • the employer has to cover any deficit between sum required to meet future payments and how much is available in the pension fund
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22
Q

How have DB schemes closed their schemes? (3)

A

termination

soft freeze

partial freeze

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23
Q

What is the termination of a DB scheme? (3)

A
  • also called hard freeze
  • closed to new workers
  • existing members no longer allowed to accrue benefits
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24
Q

What is the soft freeze of a DB scheme? (2)

A
  • closed to new members
  • existing members can continue to accumulate benefits
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25
Q

what is a partial freeze of a DB scheme?

A

scheme is frozen for some but not all members

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26
Q

What is a DC scheme?

A

tax-efficient wrapper for investment savings pot

contributions made by company and employee until retirement

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27
Q

What can a pensioner use a DC scheme for in retirement? (3)

A

buy annuity

income drawdown

invest for income strategy

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28
Q

What is mortality risk?

A

pension pot runs out before dying

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29
Q

What elements can you examine when selecting a fund manager? (4)

A

past performance

consistency of management personnel

internal risk controls and regulation

fees and managers’ compensation

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30
Q

how do you examine past performance of a fund manager? (3)

A
  • consistency of returns over medium to long term period (5-10 years)
  • quantitative assessments (Sharpe and other risk adjusted ratios, maximum drawdowns)
  • attribution analysis
31
Q

Why is it important to check cosistency of management personnel?

A

company’s track record may be dependent on key individuals who are no longer with the company

32
Q

When does consistency of management personal might not matter as much? (3)

A

well resourced fund management house

well defined team based approach

team delivers results not key individuals

33
Q

How should a new fund manager be assed when recently assigned to a fund? (2)

A

relevance and sufficiency

i.e. bond strategy to bond strategy, not bonds to emerging markets

34
Q

What are red flags for fund managers? (2)

A

history of short tenures

lack of experience with the investment strategy

35
Q

If trust net or morningstar doesn’t have data of the manager of a fund, where can you look for this information?

A

fund house’s website

36
Q

What does internal risk controls refer to in fund management?

A

the due dillegence processes and risk controls within an organisation

37
Q

What should an investor look for when carrying out due diligence on a fund? (3)

A
  • independent custody
  • the size and independence of the firm’s auditors
  • consistent returns which seem ‘too good to be true’
38
Q

What does investment stewardship refer to?

A

the manager looking after the assets in a portfolio/fund as a ‘steward’ on behalf of other stakeholders

not just a short-term trader

39
Q

What does the FCA do?

A

regulate the conduct and prudential supervision of firms that carry out a range of business activities in:

  • retail and wholesale banking
  • investment
  • securities
  • insurance markets
40
Q

What does the following do in harmony?

  • Prudential Regulation Authority (PRA)
  • Bank of England (BoE)
  • FCA
A
  • PRA and BoE authorise and supervise firms that are allowed to conduct financial services-related businesses in the UK
  • FCA monitors conduct
41
Q

What are the three FCA operational objectives?

A

Security - Efficiency - Integrity

  • securing an appropriate degree of protection for consumers
  • promoting efficiency and choice in the market for financial services, and
  • protecting and enhancing the integrity of the UK financial system
42
Q

What is the aim of the UK corporate governance code?

A

enhance the quality of engagement between investors and companies to help improve long-term risk-adjusted returns to shareholders

43
Q

Who owns and authored the Corporate Governance Code?

A

Financial Reporting Council (FRC)

44
Q

Give an example of bad information disclosure that could cause concern for a manager (5)

A
  • board failed to provide investors with information
  • i.e. company’s performance
  • creating unnecessary uncertainty
  • damaging goodwill
  • and reputation
45
Q

How does the UK corporate governance code help with dialogue between companies and shareholders? (5)

A
  • helps both sides develop a mutual understanding of objectives
  • alters the company to investor opinions
  • companies know what is the expected return on investment
  • helps fund managers question, seek clarification, and stay informed
  • can be used to influence and change where appropriate
46
Q

Re Corporate Governance Code, what five things does a company perform if dialogue is not enough?

A
  • slow to adapt to new opportunities and risks
  • inferior products
  • inadequate succession planning for key directors
  • headed by one or more directors that don’t have the necessary skills and vision
  • be focused on the wrong priorities i.e. merger or acquisition
47
Q

If a corporate board does not respond constructively, then fund managers may wish to escalate their action by:

A
  • collaborating with other shareowners
  • making a public statement
  • submitting resolutions at shareholders’ meetings
  • requisitioning an EGM
48
Q

What is the UK stewardship code?

A

a set of principles directed at institutional investors who hold voting rights in UK companies

49
Q

Give a summary of a fund manager’s influence over and responsibilities concerning the information disclosure process (3)

A
  • communicate with standard-setters and market authorities where appropriate
  • Demonstrate satisfaction or otherwise with a company’s disclosure
  • Communicate with the directors of the firm
50
Q

How should a fund manager communicate with a director of the firm for good stewardship?

A
  • cite reasons for accountability and transparency for why the firm should consider their request positively
51
Q

What do voting shares give?

A

gives a fund manager the potential to send powerful messages to corporate directors

52
Q

How does voting help re stewardship?

A

influence the corporate control and governance agenda, as well as ensure a line of accountability from corporate managers, through the board of directors, to the owners of the firm.

53
Q

How can people with voting shares vote? (3)

A
  • withholding, or abstaining from a vote
  • voting against re-election of one or more directors
  • voting for the appointment of alternative candidates
54
Q

What happens in a direct securities class action? (direct litigation)

A

one or more shareholders or a representative brings a lawsuit against a company on behalf of other shareholders in the same class

55
Q

Who is the lead plaintiff in a direct securities class action and what do they have to do? (2)

A
  • shareholder
  • responsible for negotiations and any out-of-court settlement
56
Q

Who can join a direct securities class action?

A

Other shareholders are able to join the ‘class’ and share in any settlement proceeds.

57
Q

What can a shareholder do if they are not satisfied with the conduct of the class action (direct litigation)?

A

can withdraw from the class and start legal proceedings of their own, perhaps with the aim of winning higher damages or seeking a behavioural change from the company

58
Q

What is the principal aim of a class action?

A

usually financial compensation

59
Q

When is a securities class action usually filed?

A

in response to a large, sudden drop in the share price prompted by negative news about a company that investors had not expected.

60
Q

What is usually the complaint in a securities class action?

A

complaint might allege that the company or one or more directors were reckless in either not knowing or not disclosing the news earlier

61
Q

Who usually files for a class action?

A

those who have suffered losses as a result of purchasing securities at earlier prices that reflected the misstatement, overly optimistic announcement, or omission of information.

62
Q

What does the violation of securities laws aim to protect investors from? (3)

A
  • financial reporting or accounting irregularities
  • misleading, inaccurate, or insufficient information
  • inadequate risk management and oversight
63
Q

What is a derivative action?

A

it is the company that files a claim against certain of its own officers and directors.

64
Q

What is usually the claim in a derivative action?

A
  • the board has failed to monitor the managers it has employed

or

  • because it is not organised as well as it could or should be
65
Q

Give an example for a derivative litigation (3)

A
  • a joint CEO/chairman might concentrate too much power on one director
  • harming effective decision-making
  • directors/officers had violated the fiduciary duty owed to the company and its owners
66
Q

What are the six Myners principles?

ECRPRT

A
  • Effective decision making
  • Clear objectives
  • Risk and liabilities
  • Performance assessment
  • Responsible ownership
  • Transparency and reporting
67
Q

What are the Myners principles for? (4)

A
  • encourage UK pension schemes and trustees to adopt best practices in investment decision making
  • meet the needs of smaller schemes
  • consider changes to defined contribution arrangements
  • enable trustees’ governance of investments
68
Q

What is included in the ‘Effective decision making’ of Myners principles? (4)

A
  • trustees centre of decision making
  • trustees should have sufficient in-house and external support
  • Invest subcommittees are recommended
  • trustees improve their investment decision making
69
Q

What is included in the ‘Clear Objectives’ of Myners principles? (2)

A
  • investment objective should be relevant to scheme and communicated to managers
  • should relate to fund’s liabilities, rather than performance relative to other peer marked pension schemes or a benchmark market index
70
Q

What is included in the ‘Risk and Liabilities’ of Myners principles?

A

– awareness and understanding of the risks and tolerance in the funds managed.

71
Q

What is included in the ‘Performance assessment’ of Myners principles? (2)

A
  • Formal processes should be in place to assess the performances of managers and trustees
  • The efficacy of trustee boards, investment managers, and consultants all ought to be evaluated on a regular basis.
72
Q

What is included in the ‘Responsible ownership’ of Myners principles? (2)

A
  • Trustees should have an established policy to discharge responsibilities as an investor
  • Trustees use their shareholder powers to actively intervene where appropriate in the running of companies in which they invest
73
Q

What is included in the ‘Transparency and reporting’ of Myners principles?

A

– keep the members and other stakeholders informed with regular communication provided as and when appropriate

CISI - Portfolio Construction Theory in Wealth Management (15 decks)

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