Investment Planning Principles

Question 1

What are the 3 models of asset alocation?

Answer 1

The scientific/theoretical approach
The pragmatic approach
Stochastic Model

Question 2

How does the scientific approach to asset allocation work?

Answer 2

Uses mathematical analysis to find the optimum balance of assets to achieve the best return for a client given their attitude to risk.

Question 3

What is the most popular theoretical position?

Answer 3

Optimisation

Question 4

What is the aim of the scientific/theoretical model?

Answer 4

To sit on the correct point of the efficient frontier as per MPT.

Question 5

How is the theoretical model set up

Answer 5

Based on asset allocations that provide the highest risk adjusted return in light of historic underlying returns, underlying risk, and correlation between the underlying investments.

Question 6

What are the criticisms of the theoretical model?

Answer 6

Only works when the world is normal, especially in regards to correlation.

Relies too heavily on past returns

May sit bellow optimisation due to clients’ ethical preferences.

Question 7

How does the pragmatic approach to asset allocation work?

Answer 7

Ignores mathematical constructs of MPT. Combines analysis of the past with the judgment of the advisors’ belief of the future.

Question 8

What is the aim of the pragmatic approach?

Answer 8

To build a portfolio based on rational analysis of the past whilst taking into account the changing world.

Question 9

What are the criticisms of the pragmatic approach?

Answer 9

Places too much reliance on the subjective judgement of the advisor/fund manager.
Poor judgement can lead to poor results.

Question 10

How does the stochastic profiling method work?

Answer 10

Uses complex mathematics, modelled by actuaries to establish the likely returns from a given asset allocation as a spread.

Question 11

What are the issues with stochastic profiling?

Answer 11

Too hard to just sit down and work out at home.
Very sensitive to changes in assumptions
Clients often regard the output of these as fact rather than educated guesswork.

Question 12

What is the strategic allocation of assets?

Answer 12

Sets asset allocation and doesn’t change unless there is a very good reason for changing.

Long-term approach

Question 13

What is the tactical allocation of assets?

Answer 13

Gives the portfolio manager the ability to vary allocation within agreed parameters.

Short-term approach

Question 14

What is core-satalitie management?

Answer 14

Using active funds to attain higher returns

Question 15

How does top-down portfolio construction work?

Answer 15

Start with asset allocation
Look at the geographical split
Look at the sector
Pick the stocks using either fundamental or technical analysis.

Question 16

What is fundamental analysis?

Answer 16

A detailed analysis of the company and related industry

Question 17

What is technical analysis?

Answer 17

Share price and trend analysis.
Focused on analysis of charts and uses of mechanical trading

Question 18

How does bottom-up portfolio construction work?

Answer 18

Simply picking the stocks the fund manager believes are the best stocks

Some investment houses use this and top-down approaches.

Question 19

What are the different fund manager styles?

Answer 19

Value - looking for good stock holding for the long term.
Growth at reasonable price (GARP) - companies with good fundamentals and future prospects for growth.
Contrairaism - finding what the market has missed.
Momentum - looking for trends that are likely to persist.

Question 20

What criteria should be used to select for the sutability of a fund?

Answer 20

Objective of the fund
Costs and charges
The fund management group
The fund manager
The type of fund and its risk
Performance
Consideration to passive management

Question 21

What shows the overall level of ongoing charges for a fund?

Answer 21

The TER (total expense ratio) does not include dealing costs for exam.

Question 22

What is esg sorted into

Answer 22

Environmental - waste, pollution, climate change
Social - diversity, community interaction
Governace - board structure, corruption, Bribery

Question 23

What is negative screening?

Answer 23

Ruling out of companies deemed inappropriate by investor.

Question 24

What is positive screening?

Answer 24

Focusing on companies that actively aim to do certain things the investor likes

Question 25

What index could be used for socially responsible investment (SRI)?

Answer 25

Ftse4good

Question 26

What is important to remember about tracker funds?

Answer 26

They often use derivatives rather than owning the actual asset, meaning there will not be dividends.

Question 27

What are the pros and cons on using pensions as a tax wrapper?

Answer 27

Tax efficient but not easy to access.
New freedom in access to benefits at 55 makes these more appeal for people with this time horizon.

Question 28

What are the pros and cons for using ISAS as tax wrappers

Answer 28

Tax efficient
No or little benefit for non-taxpayer to invest in equity ISA
Limit on investments will be a problem for those seeking to make larger investments.

Question 29

What is the pros and cons of using collective funds as a tax wrapper?

Answer 29

Allows CGT allowance to offset gains, but regular changes to portfolio will mean buying and selling representing a disposal for tax.
Income taxed- people likely to be lower tax payers in the future may be better using a wrapper that allows income roll-up.

Question 30

What are the pros and cons of onshore bonds?

Answer 30

Gains taxed upto 45%. (20% in the fund 25% out) No tax reclaim for non tax payer.
Switches are not disposals.
Upto 5% of original capital can be withdrawn for 20 years without immediate tax.
Non-income producing so less admin for trustees.
Personal savings allowance can be offset against the gains.

Question 31

What are the pros cons of offshore bonds?

Answer 31

Many of the same advantages as onshore.
Able to benefit from gross roll-up
Non taxpayers can largely escape tax

Tax is not deducted within the fund
Charges may be higher than onshore bonds

Question 32

What are the pros and cons of VCT, EIS and SEIS?

Answer 32

Highly tax efficient
Tax relief on investment and opportunity to take out money tax free at other end.

Higher risk

Question 33

What is the advantage of using a wrap?

Answer 33

All wrappers held on one platform
One consolidated statement would show all the investments and valuations are available online.
Single tax statement makes tax easy to handle.

Question 34

What is open aritecure?

Answer 34

A way of charging a wrap with a single admin fee and with commision rebated.

Question 35

What is attitude to risk?

Answer 35

How the client feels about risk?