Chapter11-Other investments classes Flashcards
Framework
1 Purpose of collective investment schemes
2 Close-ended and open ended collective investment schemes
3 Net asset value per share for an ITC
4 Investment and risk characteristics of an investment trust company
5 Investment and risk characteristics of a unit trust
6 Advantages of collective investment schemes over direct investment
7 Disadvantages of collective investment schemes over direct investment schemes
8 Differences between open-ended and close-ended CISs
9 Futures and forwards
10 Long and short positions
11 Options
12 Warrant
13 Main uses of derivatives
14 Main reasons for investing overseas
15 Fundamental problems of investing overseas
16 Practical problem with investing overseas
17 Methods of indirect overseas investment
18 Advantages and disadvantages of investment in multinational companies
19 Factors to consider when investing in emerging markets
Investment and risk characteristics of an investment trust company (10)
- Stated investment objective written into prospectus / offer for sale document
- Closed-ended
- Public company, governed by company law
- Often quoted on stock exchange
- Can raise both debt and equity capital
- Operated by company directors and investment managers (eg merchant banks or specialist ITC managers)
- Directors and investment managers receive fees
- Investor buys ‘shares’ in the ITC
- Share price is determined by supply and demand
- Share price often stands at a discount to (i.e is less than) the company’s NAV per share
Investment and risk characteristics of a unit trust (9)
- Stated investment objective
- Open-ended
- Trust, governed by trust law
- Limited ability to gear
- Operated by trustees (eg insurance companies or large banks) and management company / investment managers (eg life insurance company)
- Trustees ensure UT is managed legally in accordance with the trust deed, hold the assets and oversee the calculation of the bid and offer prices and the administration of the UT
- Trustees and UT managers receive fees
- Investor buys ‘units’ in the UT
- Unit price is based on NAV per uni
Advantages of collective investment schemes over direct investment (12)
Access to larger / more unusual investments
Discount to NAV – assets may be bought cheaply (ITC only)
Diversification
Divisibility
Economies of scale in the case of larger collective schemes
Expected return higher due to the extra volatility associated with gearing and changes to the discount to NAV (ITC only)
Expertise of investment managers
Index-tracking of a quoted investment index is possible
Marketability (possibly)
Quoted prices making valuation easier
Suitable for small investors
Tax advantages (possibly)
Disadvantages of collective investment schemes over direct investment schemes (5)
Loss of control
Additional layer of charges: management fees for investment managers
Need to hold some cash for liquidity which reduces expected exposure / return (UT only)
Extra volatility caused by gearing / discount to NAV changing (ITC only)
Tax disadvantages (possibly)
Differences between open-ended and close-ended CISs (9)
- Shares in closed-ended CISs are often less marketable than the underlying assets. Marketability of units in open-ended CISs is usually guaranteed by the managers.
- Some open-ended CISs (eg property UTs) need to hold cash to maintain liquidity → lower expected returns but greater price stability.
- Closed-ended CISs can gear, leading to extra volatility. Open-ended CISs cannot be geared or have limited gearing.
- Share prices in closed-ended CISs are also more volatile than the prices of the underlying assets because the size of the discount to NAV per share can change. The price volatility of units in an open-ended fund should be similar to that of the underlying assets.
- Increased volatility of closed-ended CISs → higher expected return.
- There may be uncertainty as to the true level of NAV per share of a closed-ended CIS, especially if the investments are unquoted.
- Closed-ended CISs can invest in a wider range of assets.
- May be possible to buy assets at less than NAV in a closed-ended CIS.
- They may be subject to different tax treatment.
Futures and forwards
Futures contract – a standardised, exchange-traded contract to buy (or sell) a specified asset at a specified price on a specified date in the future.
Forward contract – a non-standardised, OTC traded contract to buy (or sell) a specified asset at a specified price on a specified date in the future.
Future Forward
Standardised Tailor-made, non-standardised
Exchange-traded OTC traded
Clearing house removes Default risk depends on
default risk counterparty
Margin paid to clearing No margin paid as traded
house OTC
More liquid Less liquid
Quoted price No quoted price as traded
OTC
Often closed out before Often results in deliver
delivery
Practical problem with investing overseas (11)
Custodian needed
Additional admin required
Time delays
Expenses incurred / expertise needed
Regulation poor
Political instability
Information harder to obtain (and less of it)
Language difficulties
Liquidity problems
Accounting differences
Restrictions on foreign ownership / repatriation problems
Methods of indirect overseas investment
- Investment in multinational companies based in the home market
- Investment in collective investment schemes specialising in overseas investment
- Investment in derivatives based on overseas assets
