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AF4 March 2025 > Investment Trust Companies > Flashcards

Investment Trust Companies Flashcards

1
Q

What is an Investment Trust

A
  1. Collective investment
  2. Managed by professional investment manager
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2
Q

What can Investment company do?

A
  1. Invest in any kind of company (listed/non-listed)
  2. Provide Venture Capital
  3. invest anywhere in the world
  4. Subject to any restrictions in articles of association
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3
Q

How do investment trust companies work?

A
  1. Structured in same way as normal company
    • Board of directors
    • Fixed number of shares
    • regulated by company law
    • shares traded on LSE
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4
Q

What is the role of the directors?

A
  1. Look after the interests of the share holders
  2. can employ fund manager directly (Self-managed trust)
  3. OR contract to external management group
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5
Q

Explain Diluted NAV per share

A
  1. Some inv. company issue loan stock that is convertible to ordinary shares
  2. This will reduce the NAV per share if they take up the conversion
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6
Q

Calculation for Diluted NAV per share

A

Net Assets + money subscribed by warrant holders / number of ordinary shares + new shares issued to warrant holders

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7
Q

Explain what trading at a Discount means

A
  1. Share price lower than NAV per share
  2. Discount = difference between share price and NAV per share as a % of NAV Per share
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8
Q

Explain what trading at a premium means

A
  1. Share price higher than NAV per share
  2. Premium = difference between share price and NAV per share as a % of NAV Per share
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9
Q

When do Discounts narrow?

A
  1. When investment performance is good and demand for shares increases
  2. Better return on share price than underlying assets
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10
Q

FCA requirements for listing as Investment Trust

A
  1. Inv. Managers must have adequate experience
  2. Adequate spread of risk
  3. must not control, seek to control or be actively involved in companies it invests in
  4. Must not be a dealer in investments
  5. have a board independent of its mgmt.
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11
Q

HMRC requirements for HMRC approval

A
  1. Not ‘close’ company (controlled by 5 or less people)
  2. Listed on LSE
  3. doesn’t retain >15% of gross income
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12
Q

What are the 2 types of trust structures

A
  1. Conventional Trusts
  2. Split capital trusts
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13
Q

Explain a conventional trust

A
  1. One main share class only
  2. entitled to all of income and capital gains produced by the trust
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14
Q

Explain Limited Life Investment Trusts

A
  1. Conventional Trust
  2. Shareholder vote whether to keep the trust going or wind it up
  3. typically extends for 3 years then another vote.
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15
Q

Explain Split Capital Investment Trusts

A
  1. Different classes of shares
  2. Entitled to different returns and ranked in particular order of priority in winding up
  3. Some offer units - packages of different share classes that produce similar returns to normal ordinary share.
  4. Limited life span - 5-10 years then wound up
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16
Q

Explain Redemption Yields

A
  1. Measure capital and income return on particular share class until wind up.
  2. Expressed as annual %
  3. Based of assumed growth rates of -2.5%, 0, 2.5%, 5%, 7.5% and 10%
17
Q

Explain Hurdle Rates

A
  1. Growth rate investments must grow at to:
    • Repay each share class
    • just repay the prior charges ranking before each share class
18
Q

Explain Asset cover

A
  1. Measure of whether company can meet the liability to share classes
  2. pre-determined redemption value / Assets of company
19
Q

What are the classes of shares in an investment trust company?

A
  1. Ordinary Shares
  2. Preference Shares
  3. Split Capital Shares
20
Q

Explain what Split Capital Shares are

A
  1. 2 types of share:
    • Income Shares - entitled to all the income
    • Capital shares - entitled to no income but all remaining assets
21
Q

What are warrants?

A
  1. The right to buy shares at a fixed price at pre-determined date
  2. bought and sold on LSE
  3. Taxed under CGT
22
Q

Why do investment companies do share buy backs?

A
  1. To return money to shareholders
  2. to tackle their discount
  3. Must seek shareholder permission
23
Q

Can investment Trusts borrow and what is it known as?

A
  1. Yes
  2. Known as gearing
24
Q

Equation for calculating Gearing

A

total gross assets/net assets x100

25
Q

What is Structural Gearing

A
  1. Different share classes have varying levels of risk.
  2. number of share classes and entitlements effect level of structural gearing
26
Q

Requirements for Geared Investment Trusts

A

FCA - Enhanced risk warnings if:
- uses gearing as an investment strat
- invests in other inv. trust companies
- result of exposure to gearing is likely to subject value of investments to significant fluctuations compared to underlying investments

27
Q

What are the charges on an investment trust company?

A
  1. Annual mgmt charge - inv. mgr. costs
  2. other expenses incurred within fund (combined with AMC = OCF)
28
Q

What are the disclosure requirements for an investment trust company

A
  1. Must provide a KID
29
Q

Where can you buy/sell investment trust company shares?

A
  1. Through stockbroker
  2. online investment platforms
  3. via regular savings schemes
30
Q

How are Investment Trust companies taxed?

A
  1. No tax on any gains from sale of shares/holdings
  2. no additional tax on franked income (dividends from shareholdings in uk companies)
  3. Corporation tax on unfranked income
31
Q

How are investors in Investment Trust Companies Taxed

A
  1. Income taxed as dividend income
  2. CGT on disposal

AF4 March 2025 (22 decks)

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