Investment Products Flashcards
1
Q
What are the benefits of investing in funds? (5)
A
- Managed for the investor - saves time
- Fund manager has the expertise to construct, monitor and adjust portfolio on investors behalf
- Economies of scale with low fees/costs
- Diversification
- Administrative burden is passed on
2
Q
What are the disadvantages of investing in funds? (3)
A
- Costs - initial charges, ongoing charges, exit fees
- Returns are not guaranteed - capital at risk
- Lack of control over investment decisions and manager
3
Q
What is a unit trust? (9)
A
- A type of collective investment scheme
- Pooled investments
- Risk reduced through diversification and costs reduced through dealing in bulk
- Regulated under COLL in FCA Handbook
- A unit trust is a trust, not a company
- Open ended
- Expand or contract depending on the demand for units
- Supply of units will always meet demand
- Unit trust manager, trustee and investment manager
4
Q
What is the role of a unit trust manager? (5)
A
- Defines the terms of the trust
- Markets the trust
- Requests the trustee to create and redeem units
- Receives payments from investors
- Appoints trustee
5
Q
What is the role of a trustee? (4)
A
- Legal owner of the trust
- Must ensure compliance with the trust deed
- Responsible for ensuring adherence to investment objectives of the trust
- Responsible for ensuring tax is paid on trust
6
Q
What is the role of an investment manager? (4)
A
- Arranges for purchases and sales of securities
- Provides valuations for the trustee
- Decides on investment strategy
- IM and unit trust manager are often the same corporate body
7
Q
What are some examples of unit trusts? (3)
A
- UCITS scheme
- A qualified investor scheme - promoted to professionals only
- A non UCITS retail scheme (NURS)
8
Q
How are units bought/sold in unit trusts? (3)
A
- Initial creation of units - when a new scheme is being marketed, units are issued at an initial price. Fund manager markets the fund to target and investors buy directly from the management group
- Subsequent issue of units - if demand increases, investors can provide the manager with funds to create new units. The trustee is responsible for creating new units
- Cashing in units - units must be traded from the fund manager, they are not listed and there is no secondary market
9
Q
How are unit trusts priced? (5)
A
- Traded through the manager - no secondary market
- Price is calculated by dividing the underlying assets of the fund by the number of units in the issue - this is calculated daily at a set time (valuation point)
- Prices are quoted one way (same price to buy/sell units) or two-way (a higher price to buy than to sell)
- For regulated unit trust, there are strict pricing regulations - bid/off spread is no more than 15%
- Spread allows the fund manager to cover the dealing costs and stamp duty
10
Q
What is a single price structure? (2)
A
- Dilution levy - cost of buying or selling the underlying asset is passed on to buyers and sellers of units as an additional charge
- Dilution adjustment (swing) is where the costs of buying or selling the underlying assets is passed on to buyers/sellers of units by incorporating then within the unit price
11
Q
What is a two way price structure? (1)
A
- The bid/offer spread is retained by the fund manager
12
Q
What is an open ended investment company (OEIC)? (8)
A
- A collective investment scheme
- Pooled investments
- A company not a trust
- Open ended - expand or contract depending on demand for shares
- Often known as ICVCs
- Authorised Corporate Director (ACD) is responsible for investment decisions and pricing. ACD is equivalent to a fund manager of a unit trust
- A depositary has custody of the scheme assets and will ensure ACDs compliance. Depositary is equivalent to a trustee
- Shares can only be bought/sold through the ACD. There is no secondary market
- Prices are quoted on a one way basis - same price is charges to buy or sell units
13
Q
What is the difference between unit trusts and ICVCs? (5)
A
Unit trusts
Legal status - trust
Pricing - one way or two way
Investors buy - units
Managed by - Manager
Assets held by - Trustee
ICVCs
Legal status - company
Pricing - one way
Investors buy - shares
Managed by - Authorised Corporate Director
Assets held by - Depositary
14
Q
What are the restrictions of Undertakings for Collective Investment in Transferable Securities (UCITS)? (5)
A
- Transferable securities (shares and bond that trade on exchanges)
- Approved money market instruments
- Derivatives and forward transactions
- Deposits
- For ICVC - moveable and immovable property
15
Q
What are the characteristics of eligible markets? (6)
A
- Regulated
- Regular hours
- Recognised by the regulator
- Open to the public
- Adequately liquid
- Has adequate arrangements for settlement
16
Q
What are investment trust companies? (10)
A
- A company with a fixed share capital
- Shares are listed on the LSE
- Company’s fund is invested in the shares and bonds of other companies - offers diversification
- Is a PLC not a trust
- Can borrow funds
- Not subject to FCA restrictions
- However, investment in any single company is restricted to 15% of NAV
- Governed by company law, FCAs listing rules and tax law
- Close ended - do not expand or contract in size
- REITS, VCTs
17
Q
How are ITCs bought/sold? (6)
A
- ITCs issue 2 classes of share, ordinary and preference, both of which receive twice yearly dividends
- After trust launches, shares can only be purchased on secondary market on LSE
- Price of shares is fixed by supply and demand
- Price will not necessarily be the same as the value of the underlying investments of the fund (or NAV)
- If share price > NAV/share, shares trade at a premium to NAV
- If share price < NAV/share, shares trade as a discount to NAV
18
Q
What is gearing? (5)
A
- Borrowing money in order to invest
- By taking out borrowings, the capital growth and income received by the ordinary shareholders of a trust will be boosted by borrowings
- The return on this extra investment minus the cost of borrowing will give an enhanced or geared profit
- Loan stock, debentures, preference shares - carry fixed liability
- Gearing magnifies what is going on in the actual investment portfolio/trust e.g. alue increases -returns increase, value decreases - returns decrease
19
Q
What is the difference between a unit trust and investment trust company? (5)
A
Unit trusts
Legal status - trust
Pricing - NAV
Market - primary
Investors buy - units
Borrowing powers - 10% no gearing
Investment trust
Legal status - company
Pricing - supply and demand
Market - secondary
Investors buy - shares
Borrowing powers - restricted by company’s constitution. Can be geared
20
Q
What is an ETF/ETC? (6)
A
- Gives exposure to equity/commodity indices
- ‘Recognition’ status granted by the FCA will allow the fund to be marketed to private investors
- Physical - portfolio manager constructs portfolio by replication
- Synthetic - portfolio gains exposure to the index through the use of derivatives such as equity swaps. Cheaper, more flexible to provide leveraged exposure ETF x2, x3 etc or short exposure (inverse funds). Synthetics are more risky - counterparty, collateral
21
Q
What are the characteristics of ETFs? (7)
A
- Open ended - not impacted by supply and demand
- Value is based on NAV
- Tracker or index funds - diversification
- Traded on secondary market - prices quoted in real time
- Low charges due to impact of primary markets where there is great deal activity
- Not subject to stamp duty
- Can be shorted
22
Q
How are private client funds managed? (4)
A
- Execution only - client makes investment choices and broker must implement transaction
- Advisory - client generally makes decision but occasionally may ask broker for advice
- Portfolio advisory - broker reviews client objectives and provides advice on portfolio construction. Client makes final decision
- Portfolio discretionary - client allows broken to make all investment decision on their behalf
23
Q
What are structured products? (2)
A
- Combination of securities with derivative element - typically an option
- Fixed life - payments to the investor will be made
24
Q
What are the 3 types of structured products? (3)
A
- Structured deposit - FTD account where interest is linked to the performance of a specified asset. E.g. if over the term the FTD the FTSE 100 stays above 6500 points, 6% is received on deposit. If not, no interest is received. Deposit is protected by FSCS but interest is not.
- Structure capital protected product - zero coupon bond with a long option, giving capital protection (through bonds) with potential upside (through option). Not protected by FSCS
- Structured capital at risk product - places some or all investors capital at risk to gain addition return
25
What are fund supermarkets? (4)
- Unit trusts and ICVC available through fund supermarkets
- Offer investments in funds from a range of fund managers all under one roof
- Consolidators of client orders
- Handle associated admin, contacting and placing of deals with managers, keeping records of investment and issuing investor statements
26
What are wrap accounts? (5)
- Consolidate and manage investors investment portfolio and financial plans
- Offered by financial institutions
- Extensive range of UK and offshore funds - unit trusts, OEICs, ITCs, equities, gilts, cash, SPs, VCTs, Hedge, ETFs, ETCs
- Appropriate tax wrappers - ISAs, pensions
- Viewable online from anywhere in world
27
What are the benefits of wrap accounts? (4)
- Only one counterparty
- Investments are viewable in one portal by the investor
- Single consolidated annual tax statement, comprehensive 6 monthly statements and documentation of all purchases
- The most professional wrap services make no charge for re-registering assets in specie on or off the platform
28
What are the characteristics of execution only platforms? (5)
- Clients choice
- No suitability required
- Placement of orders, confirmation of execution
- Holdings held in a nominee account
- Periodic reports on portfolio including any changes
29
What are offshore funds? (3)
- Unit trust domiciled overseas
- Investors money is pooled and then invested in the shares of companies
- Fund itself does not pay UK tax
30
What are funds of funds? (5)
- Manager invests in other hedge funds rather than underlying assets
- Expertise in choosing funds that will perform the best
- Diversified
- Fund of fund may have exposure to fund that have closed which is beneficial
- Drawback is investor is paying two sets of fees - third party costs and management fees
31
Who do unregulated collective investment scheme and investment products target? (5)
- Wealthy investors
- Institutional investors
- Charities
- Other UCIS
- Hedge funds are an UCIS
32
What are the features of unregulated investments? (5)
- Cannot promote themselves to retail clients
- More risk
- Restricted in their investment powers by lower levels of regulations
- Lack of transparency in management decisions, investments, performance
- Although the fund will not be regulated, the fund manager themselves must have FCA authorisation
33
What are the features of a hedge fund? (4)
- Unregulated
- Use of investments and risk management to generate positive absolute returns regardless of direction of the market
- Achieves goals through shorting, borrowing to enhance gearing and use of derivatives
- Charges are both fixed flat fees (1-2% but can be as high as 5%) on AUM and additional mgmt fee (20-25%) based on the positive returns
34
What are the difference approaches of hedge funds? (5)
- Event driven - seeking returns by investing in securities that will be affected by a specific event such as M&A
- Market neutral (relative value funds) - seeking returns that have little-to-no correlation with a traditional market. Using arbitrage, these fund tend to be quantitative in nature
- Long/short funds - Directional views on the market, sectors and countries using equity and fixed income. Longing securities believed to rise and shorting securities believed to fall.
- Tactical trading - taking a view based on technical analysis using computer models. Whereas discretionary managers use a more qualitative and holistic approach
- Fund of funds - combines units of many hedge funds in the portfolio of assets. Fund of hedge fund is still considered a hedge fund by the FCA. 2 lots of management fees.
35
What are the 3 types of private equity? (3)
- Venture capital - brand new companies
- Growth capital - buying a minority stake in an established company seeking growth and efficiency
- Buyouts - existing PLCs being bought out to become private
36
Who are the investors in private equity? (2)
- General partners - manage the fund but also invest
- Limited partners - other investors in the fund
37
What are the 3 investment methods in private equity? (3)
- Primary - investors commit capital to a new fund as new investment opportunities arise. This gives maximum opportunity for return but also the most risk - target companies have not been bought yet
- Secondary - a limited partner sells their holding to another investor
- Co-investment - where the limited partners of the fund also invest directly in the companies held in the fund
38
What are the fees of private equity? (2)
- 1-2% mgmt fees
- 20% carried interest of total returns generated or the returns - hurdle rate
39
What are the advantages and disadvantages of private equity? (8)
Advantages:
- Return is enhanced by liquidity premium
- Leverage further increases return
- Low correlations with traditional investments
- not exposed to short term reporting/goals
Disadvantages:
- Long term investment is required
- Leverage adds risk
- Performance is difficult to measure
- Low initial cash flows
40
What are pension funds and what are their features? (6)
- Investment scheme where the contributors are saving for retirement
- Contribution are tax free (CGT/income)
- Personal pension vs occupational pension
- Defined contribution scheme (personal pension) - contributions are invested to grow over time. Final value determines the pension paid
- Defined benefit scheme - schemes guarantee to pay a pension of a certain size on retirement e.g. fixed percentage of employees final salary. LDI - very liquid.
- SIPPs - investor chooses underlying investments
41
What are life insurance funds invested in? (1)
- Inflation resistant investments such as equities and land/property
- Medium to long term investments
42
What is term life assurance? (4)
- Covers a pre-determined period only
- If person dies within a specific period, the policy pays out. If the person dies outside the period, the policy expires - no payment is made.
- Sometimes a savings element built in - endowment - which pays out a sum at the end of the term, as well as covering individual in the event of death
- Endowment pay outs are exempt from tax - qualifying policies. Paid in gross
43
What are whole of life policies? (1)
- Covers the whole of a person’s life and pays when they die
