Collective Investment Vehicles Flashcards
Why are investment vehicles in existence?
They meet a need, they’re convenient Cost-effective way of obtaining a diversified portfolio for a small investor and of getting expert or specialist investment management for small investors
Taxation advantages
Improvement to marketability
What are the disadvantages of Collective investment vehicle
Loss of control
Management charges are incurred,
Maybe tax disadvantages, such as withholding tax which cannot be reclaimed.
What are the advantages of Collective investment vehicle
Great for smaller investors.
Good for obtaining specialist expertise and diversification
Some costs of direct investment management are avoided.
Holdings are divisible
Marketability advantages
Can track the return on a specific index in a cost effective manner.
Gearing is possible.
Can be tax efficient
What are collective investments
Collective investments (known as mutual funds in the US) are structures for the management of investments on a group basis. Can be closed ended or open ended
What is a closed ended vehicle?
Once the initial tranche of money has been invested, the fund is closed to new money. So, after launch, the only way of investing in the fund is to buy from a willing seller. Once money is invested you have a share in it and you have geared investment if your fund manager is very good this could work out very well.
What is a open ended vehicle?
Investment or disinvestment can be made at regular intervals by expanding or contracting the size of the fund (through creating or canceling units).
What do the regulations around collective investment vehicles usually detail?
Categories of assets that can be held; the maximum level of gearing and any tax relief available
Define investment trusts
Investment trusts are a form of closed-ended fund. They are public companies (so can raise loan and equity capital) whose function is to manage shares and/or other investments.
Have a board of directors but day-to-day investment is by appointed investment managers
They have stated investment objectives,
Investment trusts should be included in the index they’re tracking
They are typically bought and sold on exchange and the NAV (net asset value) is fair price for one share dictating their value
What is the market anomaly with investment trusts
The shares usually trade at a discount - can be cause of illiquidity? Buying extra charges.
Explain a Unit trust
Unit trusts are an open-ended fund. They are trusts in the legal sense, and, as such, are subject to trust law
Trustees ensure that the trust is managed according to the Trust Deed, and to hold the assets in trust for the unit holders
Unit trusts generally cannot borrow against their portfolio
Unit trust has a stated investment objective.
Units can be created or redeemed with investors buying or selling - managers create units is supply>demand
Tend to be more marketable and diversified because of limits on amount of investment in one sector/equity
Why is unit trust pricing tricky
Fairness to all generations.
I have to be fair to you and how I’m selling to you but I also have to be fair to existing unit holders.
Equity (in sense of fairness) considerations require that the unit price is set so that all the other unit-holders are financially indifferent to the marginal unit transaction.
How is the price of a unit set?
Equity (in sense of fairness) considerations require that the unit price is set so that all the other unit-holders are financially indifferent to the marginal unit transaction.
Price is determined by the market price of the assets
Explain the offer pricing basis
Offer price = price of unit to buyer
Bid price = price of unit to seller
Offer-pricing basis is the price of a unit when the marginal transaction in the fund is to create units (i.e., expanding fund).
What is the value of unit fund at replacement value?
Market value + any buying costs.
Compare open ended and closed ended investment vehicles under marketability
Marketability of closed ended funds is less than marketability of their underlying assets whereas marketability of units in an open- ended fund is guaranteed by the managers
Compare open ended and closed ended investment vehicles under gearing
Gearing of closed-ended funds can make the shares more volatile than the underlying equity. Most open-ended funds cannot be geared or gearing is limited
Compare open ended and closed ended investment vehicles under volatility
Shares in closed-ended funds are more volatile than the underlying equity as size of the discount to nav can change. The volatility of units in an open-ended fund is similar to underlying assets.
Compare open ended and closed ended investment vehicles under investment options and tax
Closed-ended funds may be able to invest in a wider range of assets than unit trusts. Why - unit funds I have to price them everytime I’m trading them. Whereas closed ended don’t need continuous prices on the underlying assets. Means the person can invest in art for example. If assets are unquoted however maybe uncertainty in nav.
Tax at different rates possibly
What are OEICS
Open-ended investment companies (OEICS) cross between an investment trust and unit trust.
They are open-ended and units are priced at NAV.
They are governed by company law
There is no bid-offer spread. Entry and exit charges are explicit
How are internal unit funds offered by life companies different
Not companies but not subject to trust law
Funds are notional - no real legal separate existence
Explain what an ETF is
Exchange-Traded Funds (ETF) are investment funds traded on a stock exchange which hold assets and oftentimes have the objective of tracking an index
They look like closed ended funds but they have a special relationship with some large broker-dealers who can create units and who provide liquidity in the shares - the authorized participants
So open ended and priced very close to NAV
List some Ways of Getting Diversified Exposure to Market
Directly…construct a portfolio.
By Exchange Traded Funds
By Index-Tracking Funds
By Unit Trusts
or Unit Funds
By Investment Companies/Investment Trusts
Using Futures in index
Using Forwards by going long on index
Define a hedge fund
A hedge fund is an investment portfolio aiming to generate profits at a constant rate under all market conditions by minimizing or hedging risk through diversified investment across a broad range of financial instruments.
