Collective Investment Schemes Flashcards
Who is responsible for holding the assets of a unit trust and OEIC?
UT - trustees
OEIC - Independent depositary
What role does the Authorised Corporate Director have for an OEIC?
Manage fund in return for AMC
How do unit trusts and OEICs tend to be priced?
UT - dual priced
OEIC - single priced
How does box management work for a unit trust?
- Units sold are not cancelled but instead put in a ‘box’.
- They’re then recycled and issued to new investors.
What is the benefit and drawback of unit trust box management?
Benefit - reduces dealing costs and charges
Drawback - may be disadvantaged by market movements
Who pays the bid and offer prices?
Bid - seller
Offer - buyer
At what price movement threshold must funds have to move to a forward pricing basis?
2%
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?
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
What is the purpose of a dilution levy?
To prevent an individual investor withdrawing a large proportion of the OEIC’s funds to prevent other investors from being adversely affected.
What’s the difference between OCF and TER?
TER includes performance fees
What condition must be met in order for dividends within an UT/OEIC to be tax-exempt?
Ability to reclaim withholding tax
What elements of an equity-based fund are subject to corporation tax?
Overseas income
Rent
Interest
Foreign dividends - can be offset by double-taxation rules
True or false? Tax is deducted at source for income distributions from a UT/OEIC.
False. Distributions are always paid gross.
How are gains from non-reporting funds taxed within the UK?
At income tax rates
On what basis are offshore funds taxed for an individual who is UK resident but non-UK domiciled?
Arising basis - taxed on all income regardless of where it’s earned
What are the benefits of using an investment trust? (2)
-Fund managers can take a longer term view than for open-ended funds.
-Ability to use gearing
What regulations govern the way charges are disclosed for UT/OEICs vs investment trusts?
UT/OEIC - UCITS
IT - PRIIPS
What principles must an investment trust abide by? (6)
- 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.
In relation to a split-capital investment trust, what is the hurdle rate?
Rate of return required to repay each share class at wind-up date.
What are the key differences associated with a split-capital investment trust vs a conventional one?
-Multiple share classes
-Shares often have a finite time period
What type of shares classes might make up an investment trust?
- 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.
What are the qualifying conditions for a REIT?
- 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.
Which element of a REIT is exempt from corporation tax?
Ring-fenced element
On what tax basis is property income from a REIT paid out?
Net of 20% income tax
Investor can then pay any remainder/reclaim
What are the three methods an ETF can use for tracking?
-Full replication
-Stratified sampling
-Optimisation/synthetic
What is the role of an authorised participant for ETFs?
-Create units by buying a basket of shares that represent the index.
-Act as market maker for trading in creation units of the ETF.
What may the authorised participant do if an ETF’s share price strays too far from the NAV?
Use arbitrage to bring prices back in line.
What does UCITS allow European funds to do?
Marketed freely across the EU (aka passporting)
What is the difference between fettered and unfettered fund of funds?
Fettered - only uses in-house funds.
Unfettered - can use funds from entire universe
Why are fund of funds considered good CGT shelters?
Fund switches don’t produce a chargeable gain
What correlation do hedge funds tend to have with equities and bonds?
Little to none
What are the four main hedge fund strategies?
-Long/short funds
-Relative value funds
-Event driven funds
-Tactical trading funds
What are relative value hedge funds?
Uses arbitrage to identify price anomalies.
What is the aim of an absolute return fund?
Aims to make a profit in all market conditions.
What is the maximum investment in an EIS that will qualify for tax relief?
£1m (or £2m in KiCs) per annum
How long must EIS shares be held to retain tax relief?
3 years
Why might an EIS be beneficial for an individual who has recently sold an asset for a large gain?
EIS is eligible for CGT deferral relief
What is the taxation position of an EIS?
Income tax: Liable to tax on dividends
CGT: None, assuming shares are held for 3 years
IHT: Usually exempt after 2 years via BR
What are the main risks of an EIS?
- High risk of failure
- Illiquid investment
- Tax relief only on initial issues
What is the maximum investment in an VCT that will qualify for tax relief?
£200k per annum
How long must VCT shares be held to retain tax relief?
5 years
What is the taxation position of a VCT?
Income tax: Tax-free
CGT: Tax-free
IHT: Falls into estate
How much tax relief is available on VCT, EIS and SEIS?
VCT & EIS: 30%
SEIS: 50%
What are the benefits and drawbacks of with profits policies?
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
What conditions must be met for a life policy to be considered qualifying?
-Min term of ten years
-Max premium of £3,600
-Can’t be surrendered or reassigned earlier than 3/4 through its term.
What is the main benefit of an offshore bond?
Gross roll up due to little/no tax drag
What is time apportionment relief?
UK income tax only applied to the gain incurred whilst investor was a UK resident.
What tax is chargeable within an offshore bond?
Withholding tax
What two elements make up a structured product?
-Zero-coupon bond (provides the guarantee)
-Call option (provides potential return)
What are the main risks of investing in a structured product? (4)
- Inflation
- Counterparty risk
- Costs
- Illiquid
What are the four different bottom-up investment strategies?
- Value
- Growth At A Reasonable Price
- Momentum
- Contrarianism
