Collective investments

Question 1

A collective investment is:

Answer 1

an arrangement that enables a number of investors to ‘pool’ their assets and have these professionally managed by an independent manager. Differing objectives - income, capital growth, combination of the two.

Question 2

Advantages and disadvantages of collective investments:

Answer 2

• Advantages of collective investments
- Many investors are not able to:
• Allocate the time to manage their own portfolios
• Have the expertise to construct, monitor and adjust their portfolios
• Benefit from economies of scale
• Diversify as easily as with pooled investments
• Disadvantages of collective investments
- Costs - Initial charge + Ongoing fund management costs
- Risk returns are not guaranteed
- Lack of control – investor loses their choice of individual investments

Question 3

Risks of UCIS

Answer 3

Unregulated schemes are deemed to be at greater risk than regulated funds due to the increased flexibility afforded over the investment portfolio.
This can include:
• Less liquidity in the assets which can lead to lock-in periods for investors.
• Larger more concentrated positions creating less diversified portfolios.
• Can be highly geared with greater use of debt and derivatives.
• Little supervision of the fund in respect of regular reporting to the regulator
creating a greater risk of fraud and conflicts of interest.
• Most unregulated schemes are actively managed and this can lead to higher charges. Performance fees can greatly increase the cost to the investor
• Generally based offshore adding currency and geopolitical risk to the investment

Question 4

CIS in the UK:

Answer 4

Regulated - 1. Recognised e.g. UCITS 2. Authorised e.g. domestic funds.
Unregulated - hedge funds.

Question 5

Open-ended funds pricing of units/shares

Answer 5

• Units/shares are not transferable
  • No secondary market
  • Trades performed with the management
• The portfolio is valued once every business day - the valuation point
• Price based on net asset value (NAV) per unit/share
  • Single pricing
  • Two-way pricing

Question 6

Open-ended funds costs

Answer 6

• Initial charges
• Ongoing management charges
• Exit charges – typically for a limited period only

Question 7

Trust vs Company

Answer 7

• The key difference between the legal structure of Unit Trust and Open Ended Investment Company (OEIC)
– Unit holders are the beneficiaries of the portfolio of assets
– Shareholders are the beneficiaries of the company
• Shares/units can be:
– Income/distribution
– Accumulation

Question 8

Private equity

Answer 8

• Typically set up as a partnership
– Invest in specialist investment and growth companies
– Seek to influence the investee companies
– High levels of debt is common
– Typically illiquid

Question 9

Major disadvantage of collective investment scheme

Answer 9

One of the major disadvantages of collective investment schemes is a lack of
transparency in pricing. The true value of a unit is assessed only once a day.
If the manager prices on a forward basis, the investor does not know the cost
of the unit until the purchase is made at the next valuation point.

Question 10

Investment trust companies (ITC) features

Answer 10

• A company not a trust
• Shares trade on a secondary market
- Ordinary shares
- Preference shares
• Closed-ended
• Can use gearing

Question 11

ITCs: Buying and selling shares

Answer 11

• Prices dictated by supply and demand

* Can trade at a premium or discount to net asset value (NAV)

Question 12

Open-ended vs. closed-ended

Answer 12

Closed-ended vehicles can:
• Invest in unquoted private companies as well as quoted companies
• Provide venture capital to new companies or companies requiring new funds for expansion
• Borrow money to help them achieve their objectives

Question 13

Venture Capital Trusts

Answer 13

These are closed-ended vehicles which invest in relatively new/start-up companies. VCTs are structured like investment trusts and traded on the London Stock Exchange.

Question 14

Exchange-traded products:

Answer 14

Incorporated as an ICVC, but tradable on the secondary markets
Only authorised participants can participate in the primary market - Buying or selling shares ‘in kind’ with baskets of the underlying securities
An adaptation of ETFs is exchange-traded commodities (ETCs)

Question 15

Physical or synthetic ETFs

Answer 15

When tracking an index, the providers of ETFs can use either physical or synthetic replication to ensure their ETFs mimic their designated indices as accurately as possible.
Physical – where the ETF provider owns the constituents of the index being tracked. Can lead to higher charges.
Synthetic – ETF provider receives the total return on an index through a derivative (e.g. a swap). Increases counterparty risk.