COLLECTIVE INVESTMENTS (Continued)

Question 1

What are investment trusts?

Answer 1

Technically investment trusts are not trusts but companies, but they are also collective investments. An inv tr is a company whose business is to invest in stocks and shares of other companies.
Investment comes from sale of shares of the inv trust, so should meet FCA requirements
No of shares is always constant so closed ended

Question 2

How do you invest in an inv trust?

Answer 2

Purchase shares through
financial adviser
stockbroker
or direct from inv trust mgr

Question 3

Fee

Answer 3

Dealing fees for purchase or sale of shares

Plus annual mgt fee typically 0.5% - 1.5%

Question 4

Share price of inv trust depend on?

Answer 4

Value of underlying investments, and also supply and demand of shares

Question 5

How are inv trusts taxed?

Answer 5

At least 85% of inc recd by fund mgrs of inv tr should be distributed to shareholders as dividends.
Fund mgrs ar exempt from CGT whereas investors have are liable to CGT from sale of shares if the income gained that year exceeds the tax exempt limit.

Question 6

What are splits/split capital investment trusts?

Answer 6

Fixed term investment trusts - most common forms of share offered are
income shares - all of the profits gained is recd, and no capital growth
capital shares - no income but when trust wound up at end of term, all the capital growth is shared.

Question 7

What are real estate investment trusts - REITs?

Answer 7

Tax efficient property investment vehicles allowing pvt investors to invest in property whl avoiding investing in property directly - read pages 142/143

Question 8

What are OEICs?

Answer 8

Limited liability company that pools investors’ funds to buy and sell shares of other companies and des in other investments. No limit to number of shares in co - so open ended, funds can expand or contract, when bought or sold.
Value based on value of underlying investments. The company made of sev sub-funds, each sub-fund offering different types of shares.
Investment by regular contribution or one-off lump sum
can only borrow for short term.

Question 9

How are OEICs reg and mgd?

Answer 9

Authorised by FCA.
Investing responsibility lies with depositary, who is
authorised by FCA to protect investor interests (Trustee)
Corporate director (Fund mgr) decides on funds to invest in, manages investments, buy and sell shares as reqd by investors, and ensure share price reflects the underlying value of OEIC’s investments.

Question 10

Pricing of OEIC

Answer 10

share price established by dividing total value of assets by number of shares issued (similar to UT)
No bid /offer price but impose a single price for buying and selling.

Question 11

Fees of OEIC

Answer 11

Initial/buying charge 3 - 5% of value of indi investment
Annual mgt charge 0.5% - 1.5%
Dilution levy - added or levied on buying or sale of shares where there are large flows of funds into or out of OEIC

Question 12

Taxing of OEIC

Answer 12

Tax collected from investor.
Fixed interest income taxed as savings income.
Equity based income taxed as dividend income.

Question 13

Risks of investing in OEICs

Answer 13

As it is collective investment, the risk is lower that of an investor investing on own,
diversified investment so risk of lower returns on one fund is offset by gains in another,
Involves the expertise of professional investment managers, so risk is mitigated

Question 14

What are endowments?

Answer 14

Are a type of investment based on life assurance - they combine both life assurance and life savings - pays out on death or at the end of term on maturity if assured survives the term.
Popular in 70s-80s as repayment vehicle along with interest only mortgages.
Common types are unit-linked or with-profits.
With profits are low risk and guarantee a minimum return - if premiums have been paid. Unit-linked endowments depend on the performance of the underlying investments and value at maturity dep on this performance.

Question 15

Friendly-society plans

Answer 15

Estd in 18th C as mutual self-help org. , but have evolved to offer fin services.
Because they are tax exempt savings plan, there is a restriction on investment and limited to £270 annual payment), £25 per month or £75 per quarter. Set up for a min of 10 years and no tax is paid upon encashment
Marketed as sav plan for parents and grandparents for their offspring.

Question 16

Investment bonds

Answer 16

Avai from life assurance companies.Collective investment vehicles based on unitised funds
They are set up as single premium, whole-of-life assurance policy. Policy document shows the details of no of units, amount paid and what fund invested in.
If unit linked, then policy holder can encash by surrendering the policy and accepts surrender value equal to the no of units multiplied by the bid price on the day.

Question 17

Why are investment bonds attractive to investors?

Answer 17

ease of investment and surrender
simplicity of documentation
ease of switching from one fund to another - gen permitted by companies within own funds without charging diff between bid and offer prices

Question 18

What kind of investment in investment bond?

Answer 18

Either unit linked str

Sometimes with-profits (assured a min return)

Question 19

How are investment bonds taxed?

Answer 19

Taxed differently, attracting 20 pc tax on capital gains
Hence when investor receives money and within limits,
1. basic rate taxpayer has no liability
2 higher rate taxpayer has 20 pc liability (40pc - 20pc wh is already paid)
3 additional-rate tax payer has 25 pc liability (45 pc - 20 pc)

Question 20

Qualifying life policy

Answer 20

A life policy which does not have tax liability on proceeds of plan - upon death or maturity
A non-qualifying policy may result in tax liability on proceeds of the plan for higher and additional-rate tax payers

Question 21

qualifying life policy criteria

Answer 21

page 150

Question 22

How is tax liability assessed for investment bonds?

Answer 22

By ‘top-slicing’
Rather than taxing the lump sum gain at maturity or payout, average return over the period of the bond
and tax assessed

Question 23

Describe ‘top-slicing’

Answer 23

Average gain from investment bond calculated for tax liability
1 Gain on policy = (Surrender value + untaxed withdrawals - original investment)
2 Gain is div by no of complete policy years
3 This is top-sliced gain i.e. average gain for each
policy year that the plan has been in place
4 Av gain in 3 is multiplied no of complete policy
years and added to policyholder’s income in that
year, to find if tax is due
If within basic rate tax band, no tax due
If higher rate then 20 pc is due
IF additional-rate band, then 25 pc is due

Question 24

Do investment bonds provide income/dividend?

Answer 24

Does not provide income or dividend
Upto 5 pc of investment can be ‘withdrawn’ each year without incurring tax liability at that point, - this can provide a sort of income
Tax is not exempt only deferred this way until the entire sum assured is tax liable at death or maturity, end of term

Question 25

Non mainstream pooled investments NMPIs

Answer 25

Collective investment schemes only avai to UK gen public - they do not fulfil criteria for regulated collective investment schemes.
Acc to FCA an NMPI
* unregulated collective investment scheme
* unit in qualified inv sch
* a security issued by spl vehicle, unless an excluded
security
* a traded life policy
* rights or interest in any of above

NMPI may invest in non-traditional assets and hence carry higher risk - also if overseas investt, no Fin Ombudsman or recourse to FSCS, - hence offered only to high net worth investors and not to retail cust

Question 26

What are structured products?

Answer 26

Products that offer some protection to capital invested sometimes 100 pc - investors who do not like to share in the possible downside of mkt, but like to share in growth possibilities

Question 27

SCARPs

Answer 27

Structured capital-at-risk products
1 A product that provides an agreed level of income or growth over a specified prd
2 return of initial cap is linked by pre-set formula to performance of an indices, combi of indices, or previously agreed basket of selected stocks from an index/indices
3 If performance is within agreed limits repayment of initial cap occurs, otherwise customer can lose some or all of investment

Question 28

Non-SCARP structured investmetn product

Answer 28

Promises a min return of 100 pc of initial cap as long as issuer of financial instrument underlying the product remains solvent, and is not affected by market risk factors.

Question 29

What are risks associated with structured products?

Answer 29

Counterparty risk
Inflation risk
Market risk

Question 30

What are wraps and platforms?

Answer 30

New to UK - from 2000s
Wrap is when a provider sets up an internet-based platform to hold all of an investor's investments within one framework, enabling investor to see all info in one place - allows investor to analyse and quantify holdings acc to value and type of holding, wraps can hold any class of asset or investment - offered by fin advisers for a fee

Fund supermarket - provides access to UT, range of funds incl OEICs and ISA but not investment trusts - investors have ‘gen investment acct’ exposed to UK tax regime. Investors pay a fee for the service - flat fee or percentage of funds held

Wrap and fund supermarket are both platforms but wraps provide more invesments than fund supermarket - all types of funds incl investment funds, offshore investments and direct equities (shares)