indirect investments unit trusts Flashcards
1
Q
collective
A
- managed
- cheaper
- buy a unit
2
Q
unit trusts and oeic
A
- allow investors to pool
- units or shares sold to investors each representing a small but equal fraction of a portfolio perhaps 10-50 shareholdings
- the assets of a unit trust are held by trusteees. In others they are independent
-fees can be an initial fee or ongoing annual management charge - unlike investment trust they are both opened ended so new units can be issued.
3
Q
investment powers
A
- rules set out any restrictions on fund
- FCA specialist sourcebook collective investment schemes sets out the rules for establishing and operating authorised schemes in the Uk.
- trust deed sets out funds eligible it only needs to say ones allowed by the FCA. It can say more
- at least 90% must be approved securities
- they have diversification rules. Cant have 10% invested in one company to reduce risk
- can only have 4% shareholdings 40 max
-must have 16 holdings - if replicating tracker find can have 20% in one share
- if a group it must be 20% max
- although there’s no regulations IA means that cash is not more than 20%
- UK retail UCITs can not gear up but investment trusts can. They are allowed to borrow 10% temporarily
- non Uk retail investment can borrow up to 100% all the time
-UCiS are unregulated but legal but can’t be marketed to individuals. They may not be covered by FSC
4
Q
Ltenative investment fund directive
A
- they are for alternative funds
- hedge funds
- private equity
- retail investment funds
- investment companies
real estate funds - they are professional institutions like pension fund
- professional ones / and ones that know.
5
Q
unit trusts managers and trustees
A
- the trustees hold the investments
- the managers run the fund
- can only create a unit trust with a trust deed
the FCA regulates unit trust
6
Q
the trustee
A
- usually a bank
- must be independent from the management group
- check the managers actions are in line with regulations .
- trustee has to remove manager is it’s not following investment objectives. Need removing if majority of unit holders voted for removal.
- the trustee is responsibility for reporting to regulator if not satisfied and arranging auditing and monitoring calculation if unit prices both for sale and repurchase by the unit trust.
7
Q
unit trustees manager
A
- manger manages it for fee.
- manger must be an authorised person
- have adequate finance
- manage the assets in according to regulations
- give information to trustees
- have a record of units for inspection from trustee
- notify the trustee and the FCA if it had breached my rules
8
Q
registering unit trust
A
- the trustees are responsible. The manager often does it or another party
- they must know who hold a them when
- used to give certificates but usually now it’s letters with the units
-Statement of recommended practice confirms the type of reports they need to create.
9
Q
unit trusts operate
A
- the trustees can remove fund manager and the FcA has to agree
- the manager must notify the fCa if it is to replace trustees
- unit trusts have a special rate of corporation tax of 20% but only for income
- no coroporatuon tax on gains within
- dividends received are classed as investment income and glow through to investors as dividends without tax liability
- equalisation is paid when units are purchased and included the income that would generate
- the equalisation payment represents a partial refund. It is used to calculate CGT by taking off initial price. They do it to make it fairer for all unit holders
10
Q
unit trust taxation cash
A
- interst distributions from non equity. ( must be 60% from these ). The taxpayer pays at local rate but they have 500 savings allowance. If it is the trust that paid the tax it is 45%. No savings allowan
11
Q
equities unit trust
A
-60% equity
- individual gets a 500 tax free
- then they are paid at CGT rates
- for trusts they have to soho at 38.95 - similar to money
- everyone gets 3k off for CGT allowance
- can’t bed and breakfast so for CGT so any switches have to have 30 days in between.
-to reduce you can sell and then buy in an IsA. Or sell to partner or selling and biting similar unit trusts. It’s the encashment side. If an OEIC has several funds as umbrella there is CGT. If it is fund of funds then won’t be.
12
Q
income and accumulations units
A
- can get an income
- if they keep it to accrue then it’s still taxable
- can be bought in single name or jointly
- must get a KID when purchased
- when seeming if it’s a certificate a new one is given and the old one returned
13
Q
share exchanges
A
they allow swapping if listed shares for the units
- can be sold or can be used for discount
- still attract tax
14
Q
pricing
A
- each unit represent value of shares
- have to value underlying security and cash
- must have fair pricing
- dual pricing creates a bid and seeling price. These take the market value add on the costs and then divide them up.
There is a buying price and a seeming price.
Selling and bid price = cancellation price
15
Q
A
16
Q
bid offer spread
A
The difference between the buying and selling price expressed as a percentage of the buying price m. Includes all fees.
- maximum permitted spread is the difference between
- when one person sells and another one wants to but there is no need to sell so less dealing cost
- if net seller it’s the bid end ie people selling get best deal
- if net buyer then then prices will be at the bid end. As demand is low then people coming in will get best price and selling is at bid end of range.
Manager moves prices basis of trust in line with demand
17
Q
box
A
- unit trusts buy and sell via the box to the manager.
- if they are selling to much then the shares sell at cancellation price.
- when fund is expanding its the creation price.
- they can match buyers and sellers in to way
- they can also sell and buy at premium.
- if they match there’s less cost and can be passed on
- less make money via this.
18
Q
unit trust forward pricing
A
- best practice
- can still go back but if investor wants can go forward
- only good thing of going back is price is set but transaction is not necessarily value.FCA has set to work on this
19
Q
OEIC
A
- the assets are held by a depository that is independent.The depository collects income valuation etc
- registered by FCA
- not listed
- it’s a company that has its own agenda
- it can have umberalla company but must have same pricing structure is forward
- 10% limit on borrowing like unit trust
- it’s audited
- reports to shareholders twice
- single pricing generally but can add dilution levy to cover dealing - these are not confirmed by FCA
- when trading the ACD issues a contract
20
Q
OEiC advantage
A
-most widely recognised. It’s easier to market than a unit
- the oeic permits multiple share classes which is different to unit trust.
investor has a range of funds covering investment objectives when umbrella fund the cost to change is a low cost
from the manager - umberella fund makes it easier to create new funds
21
Q
oeics taxed
A
- corporation tax is payable by oeic in income received according to the source less the expenses. The annual fee is tax relieved provided there is sufficient income
- dividends are paid without deduction if tax like unit trust.
- personal CGT can arise from an internal sale in a fund switch or overall sale
22
Q
off shore funds
A
- they are usually in low tax places and are collective investment veichles
- must be recognised by FCA to be promoted
- transition period extension on passporting for forms that asked to before end of transition
- similar oeics not unit trusts
- they have umbrella funds
- to get uk marketing status must be recognised. but can’t cold call. managers need to be member of body or parent company can do it through marketing
23
Q
uk marketing status
A
funds without recognition are restricted. they are used by intermiedateries. Can’t be advertised.
24
Q
taxation offshore reporting find
A
- most uk resident and domincilled prefer this
- dividends are tested in the same way as UK based fund
- capital gain on disposal is subject to standard CGT
-dividends from funds constituted as companies are taxed as foreign dividends. these are subject to income tax like dividend from equity - where it’s 60% fixed interest distribution will be treated as payment interest in hands if UK investor and will have income tax
- first is 0
- use the PSA
25
taxation offshore non reporting funds
- they are usually rolled up
- encashemt is CGT but no cgt allowances and they are all subject to income tax from 20-45
- no starting rate, dividend allowance
- for investors not resident they will be UK tax free but subject to other
- foreign nationals who are non dom will use them as they won't have to pay IHT
26
off shore funds tax treatment
- they are not tax free
- in equities they will have withholding tax. on small yields not a lot but a lot on big
-investments in fixed interest securities will generally put money in securities that yield tax free income as they choose euro corporate bonds and exempt gilts
27
offshore investment
- equities focus on growth not income because of tax
- Many foreign investors prefer bonds of major currencies. Sterling is big and the biggest is a mix of all the currencies in one
28
closed investment trust companies
- quoted on stock
- can invested in listen or non listed companies
- it is able to gear
- they don't have to sell holdings when cash is required like unit trust
- tan by independent board of trustees that usually hire a management group.
29
30
share price closed ended investment companies
-get the total liability and the asset.
- then divide by shareholders
- remember in dill outed NAV assumes that there are no holders of options which have a right to a stock. To calculate a more accurate all the people who had rights would be added on
31
regulation of closed investment trusts
- must be listed
- must not be closed so more than 5 investors
- must not keep 15% income
- must have memorandum
- mangers must have adequate experience
- there must not be an attempt for company to control the companies in that it invests
- can invest in any company
32
closed ended investment conventional and other
- conventional has mainly one type of share
- limited life means then after which shareholders will vote either to keep open or not every 3 years
- split capital investment trusts has one portfolio but different shares entitled to different benefits
-hurdle rates amount of growth needed to pay our
- ordinary share - they are entitled to income and growth in conventional after all borrowing and fees
- preference share pays a dividend that must be paid before income is distributed to ordinary shares and have claim to company asset ahead
- split capital shares - income shares are entitled to income and a predetermined capital return and capital shares that are not entered to it but entitled to calita
33
split capital share zero dividend
- pays no income
- fixed redemption date
preferential rights over distribution of capital at end subject to borrowing and fees
- issues at an initial value which will in effect rise at a pre determined compound annual growth rate until it reaches final redemption
- prices and redemption value are affected by security of portfolio and interest rate
-the shares have no entitlement to any of the residual capital
- it's capital gains tax not income tax
-low risk as the amount at the outset is enough to cover - this is riskier tho
- investors will need to check he well a guests zeros are covered to ascertain the risk and the nature of the trusts investments
34
income shares
- traditional - has the right to income with a fixed redemption price. This is usually the issue price subject to their being assetseft after debt had been paid
- split calital issues have income shares like an annuity with high level income but only nominal redemption amount that is less than issue ie 1p for 100
- ordinary A found in trusts in combination with zeros. They have no redemption value determined but revive income and capital left after zeros and borrowing. These shares are for investors who want above average income and a willing to risk capital.
- capital shares get paid capital after other shareholders . no entitlement to income. But they have a higher chance of gains due to hearing affect. Higher risk investors would take these as they could suffer loss.
- packages units these are all bundled giving the same as orifnarubahare in conventional trust.
35
gearing
- financial is
total assets
------------------ x 100
net assets
trusts can use it to borrow to invest.
- the borrowing can help the performance
- can use foreign currencies or unsecured loan stock
36
gearing
- split capital trusts can also be structurally geared.
- different classes have different risk depending on order, number of the differ t types.
Those split capital investment trusts with high levels of financial gearing in addition to their structural gearing, will be even higher risk.
- when gearing results in loss or profit you can gross amount / shareholders assets x 100 to her percentages
- The FCA has COB rule meaning that clients should be told if the investment trust engages in gearing.This us financial, if it also invests in others that use it, different share classes but also investing in other instruments such as derivatives and warrants
- conventional trusts with below 30 % are within risk level so don't need to highlight risks
37
fees
- the main difference between the TER OCF is that OFC has performance fee
- UCITS must use OCF
- TEE includes AMC trustee fees depository custodians audit and registrar
- neither included broker fee, dealing, interst on borrowing exit
- bid offer spread is other fee
- investors who go via an isa have to pay the fees
- dealing fees and SDR are also billed
- fees for the OCF must be told on a 3 page key investor page.
38
investment trust deal
- some do execution only
- some have regular savings plans ie £50 per month. Lump sum £250
- share exchange allows buyers to swap shares
can have reinvestment scheme
39
taxation of investment companies
- company
- no CGT
- no additional tax on franked income
- they offset the corporation tax with costs . IE interest and gilts are the profit but expenses will be high so will pay virtually no tax
investor :
- same as most
- sums are taxed as dividend
- CGat in profit. Dividend allowance
- CGT annual exemption
If they i eat through an isa they don't pay corporation tax or capital gains tax
40
investment trust b unit
- unit trusts have initial fees but investments don't.
- ANC of old investment is lowe
- investments in investment have different share types do higher risk.
- investment trust can have a discount to NAV
- investment can gear money to accelerate gains. Use total assets / shareholder assets x 100 to get figure
- investment trust with discount to NAV get higher gains. same amount buys more assets and security
- all investors in an investment trust are treated differently
- some unit trusts such as protected don't exist in unit trust.
41
OEIC Diversification rules
- can only have 4 separate shareholdings of 10%
-they can hold 20% if they are tracking
-If investing 35% in a single gilt issuer then they are required to invest in at least 6 holdings. No single stock can exceed 30% of the value of the fund
UK UCITS
- can hold 10% in unapproved stocks
- 20% can be in units if another collective investment scheme
- UKCITS and non UCITs can hold warrants
- Most managers hold 5% cash there is no limit but in practice IA imposes 20%
42
CGT from 31 March
-18% on basic rate
- 24% above
43
friendly societies
- no income tax
- can now invest in all
- protected under FSCS
- must be covered by 75%
- most 10 years with annuity in a lump sum that feeds into plan they can invest maximum £270 yearly or £300if paid monthly
