Investment Products Flashcards
What are the advantages of collective investment vehicles?
- Lower cost than direct investments as you can pool.
- Professionally managed and greater diversification benefits.
- Specialisation and exposure to foreign investments can be achieved.
- Capacity to only invest small amounts of cash into a larger fund.
What are the disadvantages of collective investment vehicles?
- Investor cannot choose specific securities.
- Performance differs over time.
What are Unit Trusts, and what are the roles of the Trustee and Trust Manager?
Open-ended funds: The size of the fund increases when investors purchase new units and there is no limit on the number of the new units that can be created.
Trustee (Bank/Insurance Company): responsible for enforcing the trust deed.
Trust Manager: responsible for marketing the fund, establishing its price and the investment management decisions.
What are the two types of pricing for Unit Trusts?
Dual Price: Bid price (selling) and offer price (buying) from the manager.
Single Pricing: No difference between bid/offer price.
What are OEICs, and what are the roles of the ‘Authorised Corporate Director’ and Depositary?
Open Ended Investment Companies.
‘Authorised Corporate Director’: Trust Manager
Depositary: Trustee
What are synthetic ETFs?
Unlike ETFs, they are exposed to derivative contracts instead of underlying assets. Increased counter-party risk.
What are the three types of structured product?
Structured Deposits: These are fixed-term deposit accounts, with the ‘interest’ being determined by reference to the performance of the underlying asset. This is often based on an investment index, with at least the initial investment guaranteed at maturity.
Structured Capital: Similar to structured deposits, but no guarantee of capital if issue defaults.
Structured Capital at Risk Products (SCARPs): Full capital at risk, if pre-defined ‘barriers’ are breached. Can be observed throughout the life of the product (US option) or at maturity only (EU option).
What is a structured deposit?
An investment with a well-defined set of risk and return objectives. It is defined in reference to an underlying asset, which could be stock indices or commodity prices for example. It relates to a specific time period and gives retail investors access to the derivative markets.
What is the Collective Investment Schemes Sourcebook (COLL) and who publishes it?
It outlines the investment and borrowing powers of collective investment schemes. It is set out by the FCA.
What does the COLL state? (U need to know)
- Investments in collective investment schemes must consist of transferrable securities.
- Up to 5% may consist of transferrable securities/money market instruments from a single issuer. This can be increased to 10% for up to 4 holdings (each with up to 10% of the scheme).
- No limit on amount invested in govt. + pubic securities - as long as 35% of the scheme’s assets are invested in the issues of a single issuing organisation.
- A scheme may borrow a maximum of 10% of the NAV of the fund.
How are Hedge Fund fees comprised?
Fixed fee + Performance fee
(Performance fee: 20-25% of upside performance (high-water mark)).
What do the ‘investing period’ and ‘harvesting period’ refer to in private equity investment?
Investing period: Usually first 5 years.
Harvesting period: The subsequent years, when returns are realised.
How are private equity funds structured?
As partnerships, investors being limited partners (LPs). LPs pay a percentage of their committed capital in fees to the investment manager, plus 20% of ‘carried interest’ if returns reach a certain level.
Why do returns in private equity tend to be higher than in listed equity?
PE investors seek a liquidity premium. PE investments also to follow a J-curve structure.
How are PE returns measured?
Investment Multiples: Which express the value of the investment returned to the LP as a multiple of what they have paid into the fund.
IRR: Captures the impact and timing of cash flows (e.g. total value paid in (TVPI) and distributed to paid in (DPI).
