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J12 - Securities Advice & Dealing > Collective Investment Schemes > Flashcards

Collective Investment Schemes Flashcards

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1
Q

Who is responsible for holding the assets of a unit trust and OEIC?

A

UT - trustees
OEIC - Independent depositary

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2
Q

What role does the Authorised Corporate Director have for an OEIC?

A

Manage fund in return for AMC

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3
Q

How do unit trusts and OEICs tend to be priced?

A

UT - dual priced
OEIC - single priced

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4
Q

How does box management work for a unit trust?

A
  • Units sold are not cancelled but instead put in a ‘box’.
  • They’re then recycled and issued to new investors.
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5
Q

What is the benefit and drawback of unit trust box management?

A

Benefit - reduces dealing costs and charges
Drawback - may be disadvantaged by market movements

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6
Q

Who pays the bid and offer prices?

A

Bid - seller
Offer - buyer

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7
Q

At what price movement threshold must funds have to move to a forward pricing basis?

A

2%

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8
Q

A fund has a NAV per unit of 90p on a bid basis and 95p on an offer basis. Bid-offer spread is 5% and initial charge 2%. What is the price quoted on a bid and offer basis?

A

90x1.05=94.5p
Bid basis quote = 90-94.5p

95x1.02=96.9
96.9x0.95=92.06
Offer basis quote = 92.06-96.9p

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9
Q

What is the purpose of a dilution levy?

A

To prevent an individual investor withdrawing a large proportion of the OEIC’s funds to prevent other investors from being adversely affected.

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10
Q

What’s the difference between OCF and TER?

A

TER includes performance fees

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11
Q

What condition must be met in order for dividends within an UT/OEIC to be tax-exempt?

A

Ability to reclaim withholding tax

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12
Q

What elements of an equity-based fund are subject to corporation tax?

A

Overseas income
Rent
Interest
Foreign dividends - can be offset by double-taxation rules

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13
Q

True or false? Tax is deducted at source for income distributions from a UT/OEIC.

A

False. Distributions are always paid gross.

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14
Q

How are gains from non-reporting funds taxed within the UK?

A

At income tax rates

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15
Q

On what basis are offshore funds taxed for an individual who is UK resident but non-UK domiciled?

A

Arising basis - taxed on all income regardless of where it’s earned

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16
Q

What are the benefits of using an investment trust? (2)

A

-Fund managers can take a longer term view than for open-ended funds.
-Ability to use gearing

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17
Q

What regulations govern the way charges are disclosed for UT/OEICs vs investment trusts?

A

UT/OEIC - UCITS
IT - PRIIPS

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18
Q

What principles must an investment trust abide by? (6)

A
  • Investment managers must have adequate experience.
  • Adequate spread of risk.
  • Company cannot control any of the assets in the portfolio.
  • Board that operates independently of its management.
  • Meet requirements of UK Corporate Governance Code
  • Seek Income and Corporation Tax Act (ICTA 1998) approval from HMRC.
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19
Q

In relation to a split-capital investment trust, what is the hurdle rate?

A

Rate of return required to repay each share class at wind-up date.

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20
Q

What are the key differences associated with a split-capital investment trust vs a conventional one?

A

-Multiple share classes
-Shares often have a finite time period

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21
Q

What type of shares classes might make up an investment trust?

A
  • Ordinary shares - shareholder entitled to all income & growth.
  • Income shares - entitled to all income produced
  • Zero dividend preference shares - pay a fixed growth rate until trust wound up.
  • Capital shares - entitled to all capital, after any loans & preference shareholders have been paid.
22
Q

What are the qualifying conditions for a REIT?

A
  • At least 75% of total gross profit must be from ring-fenced element.
  • At least 75% of total assets must be from ring-fenced element.
  • Interest coverage ratio must be at least 125%.
  • At least 90% of ring-fenced profits must be distributed to investors within 12 months of the end of any accounting period.
23
Q

Which element of a REIT is exempt from corporation tax?

A

Ring-fenced element

24
Q

On what tax basis is property income from a REIT paid out?

A

Net of 20% income tax
Investor can then pay any remainder/reclaim

25
Q

What are the three methods an ETF can use for tracking?

A

-Full replication
-Stratified sampling
-Optimisation/synthetic

26
Q

What is the role of an authorised participant for ETFs?

A

-Create units by buying a basket of shares that represent the index.
-Act as market maker for trading in creation units of the ETF.

27
Q

What may the authorised participant do if an ETF’s share price strays too far from the NAV?

A

Use arbitrage to bring prices back in line.

28
Q

What does UCITS allow European funds to do?

A

Marketed freely across the EU (aka passporting)

29
Q

What is the difference between fettered and unfettered fund of funds?

A

Fettered - only uses in-house funds.
Unfettered - can use funds from entire universe

30
Q

Why are fund of funds considered good CGT shelters?

A

Fund switches don’t produce a chargeable gain

31
Q

What correlation do hedge funds tend to have with equities and bonds?

A

Little to none

32
Q

What are the four main hedge fund strategies?

A

-Long/short funds
-Relative value funds
-Event driven funds
-Tactical trading funds

33
Q

What are relative value hedge funds?

A

Uses arbitrage to identify price anomalies.

34
Q

What is the aim of an absolute return fund?

A

Aims to make a profit in all market conditions.

35
Q

What is the maximum investment in an EIS that will qualify for tax relief?

A

£1m (or £2m in KiCs) per annum

36
Q

How long must EIS shares be held to retain tax relief?

A

3 years

37
Q

Why might an EIS be beneficial for an individual who has recently sold an asset for a large gain?

A

EIS is eligible for CGT deferral relief

38
Q

What is the taxation position of an EIS?

A

Income tax: Liable to tax on dividends
CGT: None, assuming shares are held for 3 years
IHT: Usually exempt after 2 years via BR

39
Q

What are the main risks of an EIS?

A
  • High risk of failure
  • Illiquid investment
  • Tax relief only on initial issues
40
Q

What is the maximum investment in an VCT that will qualify for tax relief?

A

£200k per annum

41
Q

How long must VCT shares be held to retain tax relief?

A

5 years

42
Q

What is the taxation position of a VCT?

A

Income tax: Tax-free
CGT: Tax-free
IHT: Falls into estate

43
Q

How much tax relief is available on VCT, EIS and SEIS?

A

VCT & EIS: 30%
SEIS: 50%

44
Q

What are the benefits and drawbacks of with profits policies?

A

Benefits:
-Regular & terminal bonuses
-Smoothed investment return - less volatility
-Bonuses cannot be taken away (except in case of early surrender)
-More secure exposure to equities

Drawbacks:
-Difficult to understand
-Opaque charges
-Potential MVR on surrender
-Less specialised investing possible

45
Q

What conditions must be met for a life policy to be considered qualifying?

A

-Min term of ten years
-Max premium of £3,600
-Can’t be surrendered or reassigned earlier than 3/4 through its term.

46
Q

What is the main benefit of an offshore bond?

A

Gross roll up due to little/no tax drag

47
Q

What is time apportionment relief?

A

UK income tax only applied to the gain incurred whilst investor was a UK resident.

48
Q

What tax is chargeable within an offshore bond?

A

Withholding tax

49
Q

What two elements make up a structured product?

A

-Zero-coupon bond (provides the guarantee)
-Call option (provides potential return)

50
Q

What are the main risks of investing in a structured product? (4)

A
  • Inflation
  • Counterparty risk
  • Costs
  • Illiquid
51
Q

What are the four different bottom-up investment strategies?

A
  • Value
  • Growth At A Reasonable Price
  • Momentum
  • Contrarianism

J12 - Securities Advice & Dealing (13 decks)

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