Collectives, Investment Strategies Flashcards
What are the main differences between Investment trusts and UT/ OEICs?
Investment Trusts
Closed ended
Priced by supply / demand
Generally lower charges
Different share classes
Can gear significantly
Often more specialised
Unit Trusts /OEICs
* Open ended
* Priced to NAV
* Generally higher charges
* Often one share class
* Gearing capped at 10%
* Often mainstream investments
What are the broad benefits of UTs / OEICs?
- Pooled investments
- Net Asset Value - Unit/share value reflects value of underlying assets
- Professional fund management
- Diversified portfolio - for a modest cost - Typically 50 to 100 different share/stock holdings within the fund
- Decreased volatility - Due to diversification
- Sale and marketing regulated by the FCA
- Valuation points – at fixed point daily (Forward priced)
- Fettered v Unfettered
What are the legal strcuture differneces between unit trusts v OEICs?
OEIC’s
* Legal structure - Company
* Independent Oversight - Depository
* Run by - Authorised Corporate Director (ACD)
* Pricing - Traditionally single priced
* Share classes - Multiple share classes but still traded via fund mgr
Unit Trusts
* Legal structure - Trust
* Independent Oversight - Trustee
* Run by - Fund Manager
* Pricing - Traditionally dual priced
* Share classes - Income & accumulation Units
What are the gearing rules on UCITS?
UCITS funds are categorised as either a Retail or Non-retail
arrangement
Retail UCITS can gear
* up to 10% of the fund on a temporary basis
* against future known cash flows
Non retail UCITS can gear
* up to 10% of the fund
* on a permanent basis.
How is an investor taxed for holding UCITS - income tax?
Non Equity Based
* Must have 60%+ of assets in Interest Bearing Securities
* Can distribute interest payments Gross
* Can use Personal Savings Allowance (PSA)/Starting Rate Band
* £1,000 Basic rate, £500 Higher rate, £0 Additional rate
* Basic rate 20% to pay, Higher rate 40%, Additional rate 45%
Equity Based
* Dividends are paid without a deduction for income tax i.e. gross
* But these are liable to income tax the same as dividends from directly held shares
* Can use £2,000 Dividend Allowance (DA)
* Excess taxed via self assessment
* Non/Basic rate 8.75%, Higher rate 33.75%, Additional rate 39.35%
How is an investor taxed for holding UCITS - CGT?
- Internal gains are tax exempt - Within an authorised UT/OEIC
Gains on investor profits?
* Same regardless of asset class in fund
* Taxed at 10/20%
* On taxable gain on disposals
* Over the annual CGT exemption of £12,300 (2022/23)
* Losses can be offset or carried forward indefinitely
What is a passive management stratergy?
- A strategy not attempting to outperform the market
- Should not require active intervention but will be self-maintaining.
2 main techniques:
* Buy & Hold
* Indexation
List the ways an investment manager could structure a passive fund?
- Full replication/physically backed - Buy ALL stocks in index at individual stock % weighting to overall index – accurate but £!
- Stratified sampling - The portfolio manager and/ or computer model divides the underlying securities of the benchmark into multiple risk buckets with similar representative charecteristics (hence SAMPLE) and selects a sample of individual secuities to build the new portofio to reflect the index
- Optimisation - Similar concept to Stratified sampling but this time computer modelling selection only hence no natural bias BOTH sampling methods introduce potential for Tracking Error
- Synthetic - Swaps / Derivative based to
artificially replicate the index
State three advantages and three disadvantages of passive managed funds when compared to active managed funds
Advantages
* Lower charges
* Eliminates fund manager underperformance
* Easy to follow
* Good liquidity
Disadvantages
* No Alpha / fund manager influenced growth
* Portfolio can be overexposed to certain sectors/stocks
* Can be a lack of dividend income
* Can be difficult to tailor portfolio to personal circumstances
What are the broad charecteristics of ETFs?
- Open ended fund - Index Passive Tracker basis
- Vast choice of ETF’s - offering index exposures to different country/sector/asset class/commodities
- Trade like shares on major worldwide stock markets
- Shares trade on “real time” pricing
- More transparent than general managed funds/With Profit
What are the key features of ETFs?
- Diversification across all markets/asset classes possible including Commodities (ETC)
- Huge choice of global ETF’s so can find “specialist” funds
- Live pricing v OEIC Tracker (Daily) – ideal in volatile markets
- Very low cost charges within fund
- Pay stockbroker fees like shares on purchase/sale but not stamp duty
- Tracking of index maybe via full replication/sampling = (possible Tracking Error)
- Physical v Synthetic Replication
- Taxation – most = UK reporting status so taxed just like Equities - so Divs (if paid) & CGT
- Can be included in ISA/SIPP
- Regulated by FCA
What are the risks of ETFs?
- Market risk/Systematic
- Non systematic/Sector
- Political risk (depending upon underlying asset)
- Concentration
- Currency
- Counterparty Risk (Synthetic)
- Liquidity risk
- Tracking error risk
- Taxation risk
Explain top down active management stratergy.
- Asset allocation
– Strategic asset allocation
– Tactical asset allocation - Geographical distribution
- Sector selection
- Stock Selection
– Fundamental analysis
– Technical analysis - Chartists / Mechanical trading rules
Explain bottom up active management strategy.
- Securities selected on own merits
- Often applies when objectives of the fund make asset allocation irrelevant
- ‘Stock-picking’
– Deep Value/Recovery/Contrarian
– GAARP
Describe a momentum investment style.
- Identify trend.
- Trend accelerating/continuing.
- Sell before trend ends.
- Ignores intrinsic value/fundamentals.
- Generally, short term.
Describe a contrian investment style.
- Believes Consensus usually wrong.
- Seeks returns from going against the herd/ market sentiment.
- Positive when outlook negative/buys out of favour stocks
- Buys at Price less than intrinsic value – undervalued stocks
- Generally, long term.
List 5 benefits of holding commodities physically.
- Diversification
- Reduce overall portfolio risk/volatility
- Negative correlation to equities/bonds
- Hedge against inflation
- Tangible
- Hedge against political instability/economic uncertainty
- Capital gains tax free if UK Gold coins/chg’ble if Bullion
List 5 disadvantages of holding commodities physically.
- No income produced
- Difficulties re Storage/extra insurance costs/risk of theft
- Price affected by supply & demand
- Wide buy and sell spread and high transaction costs
Describe the charecteristics a derivative.
- A financial contract that ‘derives’ its value from the value of an underlying asset
- Originally used in commodity trading but more recently used for stocks & shares as well
- Can be used to speculate and more commonly to hedge risk
- Need a general understanding of these for AF4 as questions are relatively common
What are the different types of derivativeas and the beneifits of factoring one into a portfolio?
- Futures
- Options
- Swaps
- Contract for difference (CFDs)
Each allows traders and hedgers to make a profit on both the upward
and downward movement in the value of the underlying asset without
actually needing to hold the asset.
Describe the charecteristics of a Future.
- An obligation to purchase / sell an asset
- at a specified price (strike price)
- on a specified future date
- Legally binding
- Can be subsequently traded on a derivatives exchange
- Buyer has a long position (committed to buy), seller has a short
position (committed to sell).
What are the 4 key reasons to use futures in a portoflio for a fund manager?
- Fund mandate may require equities to be held in portfolio regardless of market conditions
- Selling large volume of stock in a large portfolio will in itself generate negative price movement against fund as well as time/costs
- Futures market is more liquid than securities market so wont move the stock price itself and deals can be completed quicker
- Futures incur lower dealing costs than selling of stock itself
Futures ideal way of hedging portfolio v adverse market movements
- Futures contracts priced in different ways per asset class but for AF4 only tested FTSE100 futures
- FTSE100 Futures, each contract is priced at £10 per index point
Describe the main charecteristics of a an option.
- An option not obligation to purchase / sell an asset at a specified price (strike price) on / before a specified future date
- Buyer of an option has the right to exercise their option, can trade it on a derivative exchange or allow it to expire worthless
- Either arranged directly (over the counter) or on a derivative exchange (exchange traded)
- A call option is the right to buy
- A put option is the right to sell.
