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CISI Inv Risk & Tax > Investment Products - 1 > Flashcards

Investment Products - 1 Flashcards

1
Q

What are the two unit classes of UTs?

A
  • income (or Inc, where all income produced by the underlying investments is paid out to the unitholder on a regular basis), (TAXED)
  • accumulation (or Acc, where income is instead reinvested within the fund). (TAXED)
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2
Q

What is the name of the fund manager of OEICs?

A

authorised corporate director (ACD)

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3
Q

Do you need to pay stamp duty on ETPs?

A

No, as they are registered offshore

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4
Q

Do physical or synthetic ETPs have a worse tracking record?

A

Synthetic

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5
Q

What is a creation basket for an ETP?

A
  • A creation basket is a specific list of names and quantities of securities or other assets that may be exchanged for shares of the ETP.
  • The creation basket typically either mirrors the ETP’s portfolio or contains a representative sample of it.
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6
Q

What is the difference between ETCs and commodity ETFs?

A
  • ETCs typically track one single commodity or commodity index.
  • Commodity ETFs enable investors to gain exposure to different commodities or baskets of commodities.
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7
Q

What is the allowed concentration within a UCITS?

A

The aggregate of its exposures to transferable securities, deposits and money market instruments, issued by members of any one corporate grouping, and of OTC derivatives if a member of that corporate grouping was a counterparty, did not exceed 20% of the fund’s NAV.

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8
Q

What are the risks of Unregulated Collective Investment Schemes (UCISs)

6

A
  • a potential lack of liquidity
  • redemption can be at the discretion of the fund manager
  • charges may be high or unclear
  • the fund may be geared, leading to risk of increased loss
  • there may be a lack of information on the fund and its past performance, and
  • no ombudsman protection
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9
Q

What is the structure of an investment trust?

A

The name ‘investment trust’ is misleading as it is a public company not a trust.

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10
Q

What wider investment freedoms do ITs enjoy?

4

A
  • invest in unquoted private companies as well as quoted companies
  • provide venture capital to new companies or companies requiring new funds for expansion
  • invest in property via REITs, and
  • gear up
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11
Q

How does the discount control mechansism (DCM) work for an IT?

A

buying shares and holding them in treasury in an effort to support the price

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12
Q

What is the typical maximum gearing of an IT?

A

A common maximum is 25–30% of the investment trust’s total assets

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13
Q

What are Split Capital ITs (splits)?

A

Split capital investment trusts usually have a limited lifespan and their various share classes are intended to appeal to different types of investors.

  • Income shares - pay out broadly all the income received by the investment trust. CAN GIVE RISE TO SUBSTANTIAL CAPITAL LOSSES AT REDEMPTION
  • Capital shares - In most cases, they pay no income whatsoever. Shareholders benefit from the bulk of the assets when the investment trust is finally wound up, after prior-ranking shares have been paid . CAN BE HIGHLY GEARED AND VERY VOLATILE
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14
Q

What are A, C, S and Zero Dividend Preference shares in an IT?

A
  • ‘A’ shares = ordinary shares, but they carry no voting rights; they will often have dividend rights over and above those of ordinary shares.
  • ‘C’ shares = temporary class of share for new money to avoid flooding the existing portfolio with cash
  • ‘S’ shares = means of launching a new investment trust with a strategy which is close to, but not quite the same as, that of an investment trust already in existence
  • Zero dividend preference shares (zeros or ZDPs) = no income, but offer a predetermined rate of return when the investment trust is finally wound up**
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15
Q

What is a Reporting (offshore) Fund?

A

Reporting funds must prepare accounts in accordance with an acceptable accounting policy and provide reports of their ‘reportable income’ which is the accounts figure for the total return of the fund adjusted in accordance with certain rules set out in the Offshore Funds (Tax) Regulations 2009 and MUST PROVIDE THE REPORTS TO HMRC

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16
Q

What is the main advantage of a reporting fund over a non-reporting fund?

A
  • Reporting funds = gains on asset disposals charged as capital gain in most circumstances
  • Non-Reporting funds gains on asset disposals charged as income and taxed higher
17
Q

What is the difference in the tax treatment of dividends between reporting and non-reporting funds?

A
  • Reporting funds - Dividends and interest are treated as gross income. Any excess above the individual’s dividend allowance (DA) or above the personal savings allowance (PSA) respectively is taxed at the standard rates
  • Non-reporting funds - investors cannot use the DA to offset against those dividends or the PSA against interest.
18
Q

What is an expense ratio for CISs?

A
  • The expense ratio is an annual operating expense that is levied on the fund’s annual earnings or investment income
  • all funds must compute an expense ratio using the same methodology,
19
Q

What is the typical annual management charge for a CIS?

A

A typical figure is 0.5–1.5% a year

20
Q

What is an annual management charge breakpoint?

A

The AMC declines as assets (in either the specific fund or in the fund family as a whole) increase.

21
Q

What is an Ongoing charges figure (OCF)?

A
  • Covers costs and expenses for the running of the fund such as dealing commissions, audit fees and custody fees.
  • Usually expressed as a percentage of the funds under management.
22
Q

What is the difference between the ongoing charges figure (OCF) and the total expense ratio?

A

the OCF excludes certain one-off charges (eg, loads; see above) and performance charges while the TER includes them.

23
Q

What is a high water mark?

A

Usually, performance fees are stated to be payable only on NET NEW HIGHS (ie, the manager will not be rewarded if the fund falls in value and their ‘outperformance’ consists of simply regaining ground that was lost)

24
Q

What is the Reduction in Yield?

A

a way of expressing the impact of all charges on a fund (as well as other investments, savings and pension policies) over a period of time

25
Q

How does single pricing work in open ended funds?

A
  • the manager/ACD will calculate a single price for the units/shares which will apply to all transactions in that dealing period
  • a dilution adjustment (also called single swinging price) can be applied whereby the fund can artificially increase or reduce its NAV to account for the extra portfolio trading costs created by any significant trading activity
26
Q

What is a dilution levy?

A
  • A charge which may be imposed by a fund manager, typically on a single-priced fund, to cover dealing costs.
  • Typical levies are in the order of between 0% and 5%.
27
Q

Why my a manager choose to switch from historic to forward pricing?

3 reasons

A
  • the fund manager believes that the FUND VALUE HAS MOVED BY MORE THAN 2% in EITHER direction
  • the investor requests a forward price, or
  • the manager may choose to deal on a forward basis on LARGE deals.
28
Q

Who can Qualified Investor Schemes be marketed to?

A
  • Professional or Qualified Investors ONLY
  • Also known as Alternative Investment Funds
29
Q

What are the qualifying rules for UCITS Funds?

A
  • At least 90% of the fund must be in approved securities
  • A retail UK UCITS fund (that’s not an index tracker) is not allowed to hold more than 10% of its value in any one company
  • holdings of more than 5% cannot represent more than 40% of the portfolio i.e. only 4 holdings can be 10% (funds must have 16 holdings 4x10% + 12x5%)
30
Q

Can UK retail UCITs funds using gearing?

A
  • For investment NO
  • For short term requirements e.g. to pay a dividend YES
  • (non retail can borrow up to 10% on a permanent basis
31
Q

How are UTs taxed?

A

Corporation tax on gains = NO

Dividend tax = NO (franked income)

Income Tax = Corporation Tax @ 20% (interest payments to investors are considered as expenses and can be offset against this

32
Q

How do dilution levies work for OEICs?

A
  • where large investments or disposals are made, a dilution levy may be charged to reflect the additional costs incurred by the fund for such an investment or disposal

e.g. if the value of the fund was £100m and one investor held an investment of £2m within this, should they sell out of the fund it is unlikely that the fund manager will be able to pay them their money simply by using inflows of cash from other investors. This being the case, the manager will actually have to physically sell assets to raise the cash and this will incur costs.

33
Q

What are the benefits of OEICs compared to other open ended funds?

Umbrella

A
  • The ability to switch between umbrella funds or fund of funds is a real positive aspect of OEICs since it allows for the possibility of changing investment strategy within the wrapper – i.e. not creating a disposal for CGT purposes.
  • the ability to offer different share classes - different classes for new and existing investors
34
Q

What the difference between fettered and unfettered fund of funds?

A
  • ‘fettered’ i.e. only the funds of one investment house, or
  • ‘unfettered’ allowing funds from the market
35
Q

What is the difference between diluted and undiluted NAV for ITs?

A

Diluted NAV = all those who are entitled to shares (for example those with convertible loan stock) will actually take those shares (and therefore increase the number of shares and decrease net asset value per share)

Undiluted NAV = without this

36
Q

What is the hurdle rate for ITs?

A

the rate at which the assets in the investment must grow per annum to deliver a certain target such as a pre-agreed redemption price (if there is one), or to meet the current share price

CISI Inv Risk & Tax (17 decks)

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