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CISI > Investment Funds > Flashcards

Investment Funds Flashcards

1
Q

list benefits of investing

A

economies of scale
diversification
access to professional investment management
access to geographical markets, asset classes or investment strategies which might otherwise be inaccessible to the individual investor
in many cases, the benefit of regulatory oversight
in some cases, tax deferral

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2
Q

list disadvantages of investing

A
  • value of shares can rise and fall
  • fees (entry or initial)
  • fees exit
  • fees annual management
  • no guarantee of fund performance
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3
Q

what does active management seek to do

A

seeks to outperform a predetermined benchmark over a specified time period.

uses fundamental and technical analysis to assist in the forecasting of future events, which may be economic or specific to a company.

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4
Q

what two terms are used in active management

A

top down and bottom up

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5
Q

what is top down management

A

manager focuses on industry trends rather than specific companies

(seeing whole industry from TOP)

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6
Q

what types of investing are included in bottom up asset management?

A
  • growth
  • value
  • momentum
  • contrarian
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7
Q

what is growth investing?

A

picking the shares of companies that present opportunities to grow sig in the long term

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8
Q

what is value investing

A

picking the shares of companies that are undervalued relative to their present and future profits or cash flows

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9
Q

what is momentum investing?

A

picking the shares whose share price is rising on the basis that this rise will continue

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10
Q

what is contrarian investing?

A

flip side of momentum investing, which involves picking shares that are out of favor and may have ‘hidden’ value

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11
Q

what is passive management?

A

portfolio seeks to track/ mimic the performance of a recognised index

no attempt made to forecast future events and outperform the market

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12
Q

what is indexation undertaken on the basis of?

A

the assumption that securities markets are efficiently priced and cannot therefore be consistently outperformed.

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13
Q

what are the benefits of passive managment/ employing indexation

A
  • relatively few portfolio managers consistently outperform benchmark equity indices.
  • the fund’s charges will typically be sig lower
  • once set up, passive portfolios are generally less expensive to run (lower ratio of staff to funds managed).
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14
Q

what are the disadvantages of passive management/ employing indexation

A
  • performance is affected by the need to manage cash flows, re-balance the portfolio to replicate changes of the index- consituent weightings and adjust portfolio for stock coming into and falling out of the index– can lead to tracking error
  • most indices reflect the effect of the value of dividends from constituent equities on the ex-dividend date.
  • may not meet all of an investor’s objectives
  • indexed portfolios follow the index down in bear markets.
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15
Q

can active and passive investing be combined?

A

yes

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16
Q

what are UK gilts, UK index-linked gilts, Corporate bonds, strategic bonds, high yield and global bonds all examples of and who classifies them?

A

the open-ended funds industry

classified by the IA

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17
Q

what is special about a UCITS (undertakings for collective investment in transferable securities) fund?

A

instead of just being authorised by the FCA for marketing to the general public in the UK it can be marketed also across Europe.

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18
Q

what is special about a NURS (Non-UCITS retail schemes)?

A

suitable for retail investors but do not meet the more pescriptive rules of the UCITS directive.

they allow a greater range of investment opportunities including direct investment in property.

allows use of a much wider range of underlying investments

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19
Q

what is a unit trust?

A

a CIS in the form of a trust in which the trustee is the legal owner of the underlying assets and the unit holders are the beneficial owners.

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20
Q

what can a unit trust be?

A

authorised or unauthorised

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21
Q

is a unit trust open or close ended and why?

A

open-ended

the trust can grow as more investors buy into the fund or shrink as investors sell back units to the fund.

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22
Q

key employees in a unit trust

A

unit trust manager and trustee

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23
Q

what does a unit trust manager do?

A
  • decide which investments are included to meet investment objectives. (buy and sell)- might outsource this decision making
  • provides a market for the units- dealing with investors who want to buy or sell units
  • daily pricing of units, which is based on NAV of the underlying constituents.
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24
Q

what does a unit trustee do?

A

is the legal owner of the assets in the trust and holds the assets for the benefit of the underlying unit holders.

  • protects the interests of the investors by:
  • monitoring the actions of the unit trust manager
  • creates new units for the trust
  • unit holders can ‘trust’ trustees with their assets.
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25
Q

what are authorised unit trusts subject to?

A

the trustees and companies are subject to special regulation- all part of global banking groups

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26
Q

what is an Open-ended investment company (OEIC)?

A

another form of CIS. OEICs are structured as a company with investors holding shares.

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27
Q

what does the FCA refer to OEICs as?

A

investment companies with variable capital (ICVCs)

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28
Q

what is the european version of an OEIC

A

an ICVC commonly found in western europe is a SICAV- it is an investment ocompany with variable capital. SICAVs often set up in Luxemborg so can be distributed to investors across europe.

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29
Q

is an OEIC open or close ended?

A

open

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30
Q

how do OEICs differ from regular companies?

A

they are establised under special legislation and not the companies acts.

they must create new shares and redeem existing ones according to investor demand unlike ordinary companies.

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31
Q

roles required for an OEIC?

A

need an authorised corporate director ACD and a depository

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32
Q

what is the authorised corporate director responsible for?

A

in a OEIC

  • day to day management of the fund–> managing investments, pricing and valuing the fund and dealing with investors
  • may undertake these or delegate to specialist third parties
  • REGISTER OF SHARE HOLDERS
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33
Q

what is a depository?

A

in a OEIC

depository looks after the investments on behalf of the shareholders and overseeing the activities of the ACD

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34
Q

what are the trustee of a AUT and depositiory both subject to?

A

the same regulatory requirments

35
Q

what is the prices at which authorized Unit Trusts or OEICS are bought and sold based on?

A

the value of the funds underlying investments (the net asset value)

BUT

the authorised fund manager is given flexibility to quote prices which can be single or dual priced (although this must be decided at the outset can’t flip between single and dual)

36
Q

what is single pricing?

A

the use of the mid-markets prices of the underlying assets to produce a single price

37
Q

what is dual pricing?

A

involves using the market’s bid and offer prices of the underlying assets to produce separate prices for buying and selling the shares/ units in the fund.

38
Q

what pricing do OEICs and AUIs use?

A

traditionally

OEICS- use single
AUIs- use dual

but all funds now have a choice of which pricing to use

39
Q

how must pricing be disclosed

A

must be in the prospectus

40
Q

what is a dilution levy?

A

if a fund is single priced- this does not provide the ability to recoup dealing expenses and commissions within the spread. SO.. where necessary such costs are often recoped using a dilution levy on purchases or redeptions

41
Q

what is used instead of a dilution levy?

A

the daily price can be swinging to a dual-priced basis depending on the ratio of buyers and sellers on any day.

42
Q

what will be charged separately to both a single and dual pricing

A

initial charge

43
Q

who sets the max price a fund manager of a OEIC or unit trust can sell new units at and what is this based on?

A

pescribed by the FCA

under dual pricing comprises the creation price (price manager must pay trustee to create new units) plus the fund managers initial charge

buying price is also calculated in a similar manner (price recieved from the fund by the manager when they cancel the units) again manager can decide selling price but can’t be less than the min selling price

44
Q

how can investors buy or sell units?

A
  • directly with the fund manager (phone/ post)
  • via their broker or financial adviser
  • through a fund supermarket or platfrom
45
Q

what is an investment trust actually?

A

a company, not a trust

46
Q

what does a investment trust have?

A

is a listed company and has:

-directors and shareholders

47
Q

is an investment trust closed or open ended and why?

A

closed ended- issues shares to investors when launched so number of shares remains fixed

48
Q

how does an investment trust work?

A

cash from primary issue of shares will be invested in a number of other investments, mainly the shares of other companies. if the value of the investments grows, then the value of the investment trust company’s shares should rise too.

49
Q

what are share classes?

A

e.g. preference shares and ordinary shares

50
Q

what is a zero dividend preference ZDP?

A

ZPDs recieve no dividends and the investor instead receives their return via the difference in the price they paid and the amount they receive when the ZDP is repaid at a fixed future date

51
Q

what is a Real Estate Investment Trust?

A

a REIT is an investment company that pools investors funds to invest in commercial and possibly residential property.

52
Q

what do REITS provide?

A

access to property returns without the previous advantages of double taxation

  • a REIT pays pays no tax on property income or capital gains on property disposals- PROVIDED that at least 90% of that income (after expenses) is distributed to shareholders.
  • income distributions are then taxed in the hands of the investor as if they had recieved that income directly themselves
53
Q

where can REITS be held?

A

in an ISA and in SIPPS

54
Q

are REITS closed or open ended?

A

close ended

55
Q

where are REITS quoted?

A

like other investments trusts they are quotes on the LSE and other trading venues.

56
Q

what is gearing?

A

when investment companies borrow money on a long term basis by taking out bank loans/ issuing bonds.

this can enable them to invest the borrowed money in more stocks and shares- known as gearing.

57
Q

when can gearing improve returns?

A

when markets are rising

58
Q

what happens with gearing when markets are falling/

A

losses are exacerbated

59
Q

the greater the level of gearing used by an investemnt trust the greater will be the ……………

A

risk

60
Q

what is the price of a share dependent on?

A

(minus an OEIC share)- a price of a share is worth what someone is willing to pay for it.

61
Q

how is the price of an investment trust share arrived at?

A
  • not necessarily the same as the value of the underlying investments (as is the case with a OEIC or a Authorised unit trust)
  • investment trust shares share prices are driven by supply and demand factors.
  • the value of the underlying investments is determined on a per share basis and is referred to as the Net asset value NAV. Price can be above or below the NAV
62
Q

what is a premium in terms of investment trust share price?

A

when the share price is above the NAV

63
Q

what is a discount in terms of investment trust share price?

A

when the share price is below the NAV

64
Q

how would you work out premium or discount?

A

1- trading price/ NAV per share

65
Q

how do investment trust company shares generally trade?

A

at a discount to their NAV- extent of this calculated daily

66
Q

how are shares in investment trusts traded?

A

in the same way as other listed company shares, shares in investment trust companies are bought and sold on the LSE using the SETS trading system or via a retail service provider (RSP)

67
Q

what is an Exchange traded fund (ETF)?

A

-investment fund usually designed to track a particular index (usually a stock market index e.g. FTSE, 100).

68
Q

how does an ETF work?

A

investor buys shares in the ETF and as more people invest the fund gets bigger and bigger as they are open ended

69
Q

where are ETF shares quoted?

A

on the stock exhange

70
Q

is an ETF open or close ended?

A

open ended

71
Q

where is an ETF traded?

A

extraMARK (LSE)- shares brought and sold via stockbrokers

72
Q

what did hedge funds orig sought to do?

A

eliminate or reduce market risk - but now reputed to be risky

73
Q

what is the structure of a hedge fund?

A

most established as UNAUTHORISED and therefore unregulated CISs meaning that they cannot be generally marketed to private individuals because they are considered too risky for the less financially sophisticated investor.

74
Q

what investment entry levels do hedge funds have?

A

high investment entry levels

75
Q

what does lack of regulation allow hedge funds to do

A

INVEST FLEXIBLY- can invest in whatever assets they wish and can take long and short positions in securities such as shares and bonds/ commodities and currencies.

76
Q

what do hedge funds seek to achieve?

A

‘absolute returns’- positive returns regardless of the general direction of market movements

77
Q

do hedge funds use gearing?

A

yes - to potentially enhance returns

78
Q

what is a prime broker in terms of a hedge fund?

A

hedge funds buy and sell investments from, borrow from and often entrust the safekeeping of their assets to one main wholesale broker, called their prime broker.

79
Q

what is liquidity in a hedge fund like?

A

to maximise the hedge fund managers investment freedom, hedge funds usually impose an initial ‘lock-in’ period between one and three months before investors can sell on their investements.

80
Q

talk about costings of a hedge fund

A

typically levy performance-related fees which the investor pays if certain performance levels are achieved, otherwise paying a fee comparable to those charged by other growth funds.

high water mark (net new heights)= highest type of performance fee often this is 20% of money gained

81
Q

what is private equity?

A

medium-to-long-term finance, provided in return for an equity stake in potentially high-growth companies. It can take many forms, from providing venture capital to complete buy-outs.

82
Q

what is a private equity firm rewarded by?

A

rewarded by the companies success, generally achieving its principal return through realising capital gain on exit. this may involve:

  • selling shares back to the managment of the investee company
  • selling shares to another investor
  • company achieving stock market listing
83
Q

what are other alternative investmetents aside from the traditional asset class of cash, bonds, property and equities

A

e.g. art, antiques and fine wine

CISI (2 decks)

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