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
2
Q
What is included in the advisory capacity phase? (3)
A
- understand future wealth requirements
- develop long-term relationship
- meeting investment objectives
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
4
Q
What is included in the wealth enhancement phase?
A
mitigate taxes
increase wealth from investment activities
5
Q
What is included in the risk management of wealth phase?
A
wealth protected from expected and unexpected risks
6
Q
What is included in the planning for wealth transfer phase?
A
ensure that heirs’ needs are met
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
8
Q
How can a fund manager neutralise currency risk?
A
- use of derivatives, including futures and swap agreements
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
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
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
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
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
14
Q
What is ethical investing?
A
incorporates data on the ethical standing, specifically, environment, social and governance (ESG) practices
15
Q
What are the two types of clients?
A
- discretionary
- non-discretionary
16
Q
What is a discretionary client?
A
gives decision making on investments to fund manager
17
Q
What is an advisory client?
A
fund manager makes recommendation to them
18
Q
What is an execution-only client?
A
client receives no advice
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
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
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
22
Q
How have DB schemes closed their schemes? (3)
A
termination
soft freeze
partial freeze
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
24
Q
What is the soft freeze of a DB scheme? (2)
A
- closed to new members
- existing members can continue to accumulate benefits
25
what is a partial freeze of a DB scheme?
scheme is frozen for some but not all members
26
What is a DC scheme?
tax-efficient wrapper for investment savings pot
contributions made by company and employee until retirement
27
What can a pensioner use a DC scheme for in retirement? (3)
buy annuity
income drawdown
invest for income strategy
28
What is mortality risk?
pension pot runs out before dying
29
What elements can you examine when selecting a fund manager? (4)
past performance
consistency of management personnel
internal risk controls and regulation
fees and managers' compensation
30
how do you examine past performance of a fund manager? (3)
- 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
Why is it important to check cosistency of management personnel?
company's track record may be dependent on key individuals who are no longer with the company
32
When does consistency of management personal might not matter as much? (3)
well resourced fund management house
well defined team based approach
team delivers results not key individuals
33
How should a new fund manager be assed when recently assigned to a fund? (2)
relevance and sufficiency
i.e. bond strategy to bond strategy, not bonds to emerging markets
34
What are red flags for fund managers? (2)
history of short tenures
lack of experience with the investment strategy
35
If trust net or morningstar doesn't have data of the manager of a fund, where can you look for this information?
fund house's website
36
What does internal risk controls refer to in fund management?
the due dillegence processes and risk controls within an organisation
37
What should an investor look for when carrying out due diligence on a fund? (3)
- independent custody
- the size and independence of the firm's auditors
- consistent returns which seem 'too good to be true'
38
What does investment stewardship refer to?
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
What does the FCA do?
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
What does the following do in harmony?
- Prudential Regulation Authority (PRA)
- Bank of England (BoE)
- FCA
- PRA and BoE authorise and supervise firms that are allowed to conduct financial services-related businesses in the UK
- FCA monitors conduct
41
What are the three FCA operational objectives?
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
What is the aim of the UK corporate governance code?
enhance the quality of engagement between investors and companies to help improve long-term risk-adjusted returns to shareholders
43
Who owns and authored the Corporate Governance Code?
Financial Reporting Council (FRC)
44
Give an example of bad information disclosure that could cause concern for a manager (5)
- board failed to provide investors with information
- i.e. company's performance
- creating unnecessary uncertainty
- damaging goodwill
- and reputation
45
How does the UK corporate governance code help with dialogue between companies and shareholders? (5)
- 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
Re Corporate Governance Code, what five things does a company perform if dialogue is not enough?
- 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
If a corporate board does not respond constructively, then fund managers may wish to escalate their action by:
- collaborating with other shareowners
- making a public statement
- submitting resolutions at shareholders' meetings
- requisitioning an EGM
48
What is the UK stewardship code?
a set of principles directed at institutional investors who hold voting rights in UK companies
49
Give a summary of a fund manager's influence over and responsibilities concerning the information disclosure process (3)
- 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
How should a fund manager communicate with a director of the firm for good stewardship?
- cite reasons for accountability and transparency for why the firm should consider their request positively
51
What do voting shares give?
gives a fund manager the potential to send powerful messages to corporate directors
52
How does voting help re stewardship?
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
How can people with voting shares vote? (3)
* withholding, or abstaining from a vote
* voting against re-election of one or more directors
* voting for the appointment of alternative candidates
54
What happens in a direct securities class action? (direct litigation)
one or more shareholders or a representative brings a lawsuit against a company on behalf of other shareholders in the same class
55
Who is the lead plaintiff in a direct securities class action and what do they have to do? (2)
- shareholder
- responsible for negotiations and any out-of-court settlement
56
Who can join a direct securities class action?
Other shareholders are able to join the ‘class’ and share in any settlement proceeds.
57
What can a shareholder do if they are not satisfied with the conduct of the class action (direct litigation)?
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
What is the principal aim of a class action?
usually financial compensation
59
When is a securities class action usually filed?
in response to a large, sudden drop in the share price prompted by negative news about a company that investors had not expected.
60
What is usually the complaint in a securities class action?
complaint might allege that the company or one or more directors were reckless in either not knowing or not disclosing the news earlier
61
Who usually files for a class action?
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
What does the violation of securities laws aim to protect investors from? (3)
- financial reporting or accounting irregularities
- misleading, inaccurate, or insufficient information
- inadequate risk management and oversight
63
What is a derivative action?
it is the company that files a claim against certain of its own officers and directors.
64
What is usually the claim in a derivative action?
- 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
Give an example for a derivative litigation (3)
- 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
What are the six Myners principles?
ECRPRT
- Effective decision making
- Clear objectives
- Risk and liabilities
- Performance assessment
- Responsible ownership
- Transparency and reporting
67
What are the Myners principles for? (4)
- 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
What is included in the 'Effective decision making' of Myners principles? (4)
- 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
What is included in the 'Clear Objectives' of Myners principles? (2)
- 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
What is included in the 'Risk and Liabilities' of Myners principles?
– awareness and understanding of the risks and tolerance in the funds managed.
71
What is included in the 'Performance assessment' of Myners principles? (2)
- 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
What is included in the 'Responsible ownership' of Myners principles? (2)
- 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
What is included in the 'Transparency and reporting' of Myners principles?
– keep the members and other stakeholders informed with regular communication provided as and when appropriate
