Investment products Flashcards by Scott Harris

OEICs and Unit Trusts are examples of open-ended collective investments. Describe how an open-ended collective investment works.

10 investors invest £100k each, thus fund has £1m to invest.
Manager creates 1m units so each unit = £1
1 year later, fund value has increased to £1.25m so each unit = £1.25
New investor invests £100k
Fund manager creates 80,000 new units (£100k/£1.25)
Fund can expand/contract at any time.
Essentially, the number of units is infinite.

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What are the main IA categories?

Capital protection
Income
Growth
Specialist
Those principally targeting an outcome i.e. targeted absolute return

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What is the maximum percentage of an OEIC/UT that can be on borrowed money?

10% - retail funds temporarily, while non-retail funds can hold permanently

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What is the income tax and CGT situation with OEICs/UTs?

CGT is liable on disposals if not held in a tax wrapper.
If non-equity OEIC/UT (>60% in interest bearing assets), income is classed as savings income and can be set against PSA.
If equity OEIC/UT (<60% in interest bearing assets), income is classed as dividend income and can be set against dividend allowance.

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What is the difference between fettered and unfettered fund of funds?

Fettered - only invests in funds from the same management group
Unfettered - not obliged to invest solely in internal funds

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What is the legal structure for an OEIC and a UT?

OEIC - company

UT - trust

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What are the investor holdings for an OEIC and a UT?

OEIC - shares

UT - units

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Who completes the independent oversight for an OEIC and a UT?

OEIC - depositary

UT - trustee

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Who has the responsibility for the day to day running of an OEIC and a UT?

OEIC - ACD (authorised corporate director)

UT - Manager

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What are the pricing structures of an OEIC and a UT?

OEIC - single (mid-market price)

UT - dual-pricing structure

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How is a disposal treated for a reporting and non-reporting offshore fund?

Reporting offshore fund is treated as a disposal for CGT purposes, whereas a non-reporting offshore fund is taxed as income.

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What is a dilution levy?

A mechanism to ensure that no-one can be adversely affected by anyone’s decision-making within the fund.

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What is a split capital trust?

An investment trust that has multiple share classes entitled to different returns.

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What is the difference between the diluted and un-diluted NAV?

Diluted NAV is calculated assuming all warrants and convertible loan stocks are exercised.

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Is stamp duty/stamp duty reserve tax due on purchases of investment trusts?

Yes, otherwise it is subject to the same taxation treatment as OEICs/UTs

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In what situation is a REIT subject to property income distribution (PID)?

When it is ring-fenced from corporation tax

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What are the criteria for qualifying as a REIT?

Minimum 75% gross profit from property letting
Minimum 75% of assets in property letting
Interest on borrowings must be at least 125% covered by rental profits
Minimum of 90% of profits from property letting must be distributed

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Why might an investor choose to invest in a REIT?

Liquid way of investing in property
Widely accessible to private investors
Tax treatment is closer to that of direct property investment

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What criteria must a qualifying investment bond meet?

Premiums must be paid at least annually
Policy term must be a minimum of 10 years
Minimum life assurance cover must be 75% of the total premiums
Annual premium limit is £3,600
Annual premiums cannot be more than 2x those of any other year.

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List the situations where a chargeable event can arise on a non-qualifying investment bond.

DAMPS:

Death
Assignment for money or money's worth
Maturity
Part surrender in excess of 5% tax-deferred allowance
Surrender in full

Why might a non taxpayer prefer an offshore to an onshore investment bond?

As there is no corporation tax within the fund, any chargeable events are taxed at normal income tax rates thus there is potentially zero tax to pay.

How is tax levied on gains for an onshore investment bond?

As corporation tax is paid within the bond, it is deemed that basic rate of tax has been paid on any gains. The effective tax rates are therefore:
BRT: 0%
HRT: 20%
ART: 25%

What are the two ways unitised With Profits funds pay out bonuses?

Fixed price system - bonuses paid by increasing number of units daily throughout the year
Variable price system - bonuses paid by daily increases in the unit price

What is the maximum annual premium amount that can be paid into a Friendly Society policy?

£25 per calendar month OR

£270 single premium

When might part and full surrender of an investment bond work well?

Part - when there's a large gain on the bond and/or the policy has been running for a number of years Full - Policy is in early years thus little gain (or even a loss)

What is the difference between a synthetic and physical ETP?

Physical purchases the underlying assets, synthetic uses derivatives to match index return.

What types of property investments could an investor choose?

``` REIT Listed Property Co shares Property UTs/ITs Insurance Co Property Fund PAIFs ```

What criteria must a firm meet to qualify for EIS funding?

``` Less than 250 employees Less than £15m in assets (£16m after raising funds) Maximum £5m raised per annum Must be in form of ordinary shares Must be qualifying trade ```

What income tax relief can you get from the following products: EIS, SEIS, VCT?

30% - EIS & VCT | 50% - SEIS

What is the maximum annual contribution an investor can make to the following products: EIS, SEIS & VCT?

EIS - £1m (+£1m for knowledge intensive companies) SEIS - £100k VCT - £200k

What is the tax situation for the following products with regards to IHT, CGT and dividends: EIS, SEIS & VCT?

EIS & SEIS - dividends taxable, CGT exempt after 3 years, IHT exempt after 2 years VCT - dividends tax-free, CGT exempt immediately, IHT liable

How can an "Additional Permitted Subscription" help a spouse when it comes to IHT?

Allows spouse to put into an ISA the higher of the value of the deceased's ISA at death or at the point it is passed on.

In what scenarios do a put option and a call option make money?

Put option in a falling market | Call option in a rising market

What is the difference between a futures contract and an options contract?

Future has obligation on both parties, option allows buyer to take up contract or let it expire

What are the different strategies a hedge fund can employ?

Long/short Relative value (arbitrage) Event-driven Tactical trading

What's the difference between hard and soft protection?

Hard protection offers 100% capital guarantee whereas soft is less

Why might structured products be more exposed to counterparty risk?

Because the protection is often provided by a third party company in the form of a zero-coupon bond.

Rank the following ETPs in order of most to least likely to be synthetic: commodities, funds, notes

Most - Notes | Least - Funds

What are the benefits and drawbacks of investment bonds?

Benefits: easy fund switching (no CGT); can be assigned to lower rate taxpayer (i.e. interspousal); No CGT; Income tax deferment good for those who expect tax rate to decrease; good for trust investments Drawbacks: non-reclaimable tax within fund (onshore) - not good for non-taxpayers; can't use CGT allowance; income tax deferment not good for those who expect tax rate to increase

Which fund is more likely to have a lower expense ratio: a managed fund or tracker fund?

Tracker fund

Why might leveraged ETCs be more volatile?

Their price movements are multiplied by a factor, so returns can be higher but so can losses

Is SD/SDRT liable on ETPs?

According to UCITS diversification rules, what is the maximum a fund can invest in one security?

10% in up to four different securities, 5% thereafter

What is the minimum proportion of a PAIF that must be invested in property investments?

60%

What is the main difference between American and European style options?

American-style can be exercised at any point up to the exercise date, whereas European-style can only be exercised on the exercise date

What two investments will typically make up a structured product?

Zero-coupon bond, providing the capital protection | Call option, providing the extra return

What do hurdle rates indicate?

The hurdle rate is the required growth rate of a split capital trust to repay all share classes at wind-up date at either current purchase price or pre-determined redemption value.

List and briefly describe the four main types of indexing.

- Full replication - buy all stocks in index - Stratified sampling - buy representative sample of stocks - Optimisation - computer programme used to electronically sample the stocks - Synthetic - uses derivatives to artificially replicate