Collective Investments

Question 1

Name 4 FCA rules applying to Collective Investments (Unit Trust & OEICs)

Answer 1

1. A fund cannot call itself guaranteed unless it offers 100% capital guarantee through a legally enforceable arrangement with a third party.
2. A non-tracking UCITS fund may not hold more than 10% of its value in one company & all holdings of more than 5% cannot represent more than 40% of the portfolio. So a fund must have at least 16 holdings (4x10% & 12x5%). Most have over 50.
3. No more than 20% of the holding may be held in companies in the same group, e.g. banking.
4. Funds holding more than 35% in UK Gilts or FI must have at least 6 different issues & no one stock more than 30% of the fund.

Question 2

What are the four main responsibilities of the Trustee of a Unit Trust?

Answer 2

1. Monitoring the manager
2. Setting up & holding a register of unit holders
3. Paying income to unit holders
4. Protecting interests of unit holders

Question 3

What are the four main roles and responsibilities of a Unit Trust fund manager?

Answer 3

1. Run the money in accordance with the Trust deed and scheme rules.
2. Keep a register of units issued.
3. Inform both Trustee and FCA of rules breaches.
4. Promote and advertise the fund.

Question 4

What is the tax treatment of a Unit Trust?

Answer 4

No CGT paid within the fund. The investor will pay CGT on disposal.

Income tax is payable by the investor (whether income is received or reinvested):-

If less than 60% of assets are in Fixed Interest, taxed as dividends, ie. no tax if NTP, £2k dividend allowance, then 7.5% if BRTP, 32.5% if HRTP & 38.1% if ARTP.

If more than 60% of assets are in Fixed Interest, taxed as interest (paid gross).

Question 5

What are the three primary advantages of OEICs over Unit Trusts?

Answer 5

1. The similarity to European funds allowing easier sales in Europe.
2. Ability to offer different Share classes.
3. Ability to have umbrella funds.

Question 6

How does the structure of a Unit Trust differ to an OEIC?

Answer 6

A Unit Trust is a Trust with a Trustee and manager. Whereas an OEIC is a company with a depository and ACD (Authorised Corporate Director) or board of directors.

Question 7

Investment Trusts- What is the share price known as if trading above net asset value?

Answer 7

Trading at a premium

Question 8

Investment Trusts- What is the share price known as if trading below net asset value?

Answer 8

Trading at a discount

Question 9

Investment Trusts- What is the difference between a diluted NAV and an undiluted NAV?

Answer 9

A diluted NAV assumes all those entitled to shares (eg convertible loan stock or warrant holders) will take those shares, therefore increase the no. shares & decrease the NAV.

An undiluted NAV doesn’t!

NAV= Assets - Liabilities
————————
No. Shares

Question 10

Investment Trusts- How do you calculate the NAV?

Answer 10

NAV= Assets / Shares

Question 11

What are some of the key features of an Investment Trust?

Answer 11

1. There is a Bid & Offer price & the difference between the two is known as the ‘turn’.
2. They are close ended & so the share price is very much driven by supply & demand.
3. Where the share price is equal to the share of the underlying investment, it is said to be trading at net asset value (NAV).
4. The diluted NAV assumes all those entitled to shares (eg convertible loan stock & warrants) actually take those shares.
5. It may retain no more than 15% of its earnings.
6. It should hold no more than 15% of its assets in one company.

Question 12

Investment Trusts- What are the two primary capital structures of Investment Trusts?

Answer 12

1. Standard or conventional - one class of shares where the investor gets all the income and gains produced.
2. Split capital - a limited lifespan. Different classes of shares issues. The income may be paid to one class of shareholder while any growth on wind-up belongs to the investor in the second class. With this type of trust a key measure is the ‘hurdle-rate’. The hurdle-rate to redemption is the rate at which the assets must grow pa to deliver a certain target such as a pre-agreed redemption price or to meet the current share price.

Question 13

What is a zero dividend preference Share?

Answer 13

It has a preference over other share classes on wind-up but pays no dividends in the meantime. It has a fixed maturity date & Fixed Return. Any gain is subject to CGT.

Question 14

How are bid and offer prices set for a Unit Trust?

Answer 14

Offer Price:-

The value of underlying assets plus Uninvested cash, plus costs, less tax, fees & expenses. Divided by no. units plus initial charge.

Bid Price:-

Broadly value of assets at best market prices, less costs of dealing to sell them, plus uninvested cash, plus accessed income. Divided by no. units.