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1. AF4 > Investment trusts > Flashcards

Investment trusts Flashcards

1
Q

What are the main differences between Investment Trusts and OEICS/Unit Trusts?

A

Public limited companies

Listed on regulated market

Subject to Companies Act

Closed ended

Can’t be classed as UCITS

Allowed to gear

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2
Q

How is the price determined for an Investment Trust?

A

Determined by supply and demand

Normal market makers bid/offer spread

Published price is mid-market price

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3
Q

What does it mean if the shares of an Investment Trust are trading at a premium?

A

If the current share prices is higher than the NAV

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4
Q

What doesn’t mean if the shares of an Investment Trust are trading at a discount?

A

The share prices is lower than the NAV

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5
Q

Is the premium/discount quoted as a percentage of the NAV or share price?

A

NAV

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6
Q

What does a premium reflect?

A

Strong demand for shares

Investors may believe underlying asset values will rise

Investors my have high regard for management team

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7
Q

How can an Investment Trust issue more shares to raise more capital without diluting the value of the existing shares?

A

Issuing Conversion Shares (c-shares)

Trade separately until new capital is invested

Merged once capital invested

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8
Q

What are the benefits and drawbacks of C-shares?

A

Avoid dealing costs

Issued at discount

Delay before investment

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9
Q

What is a warrant?

A

Right to buy a share at pre-determined price on pre-set dates

Issued by IT when launched free of charge as an incentive

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10
Q

What happens if they don’t want to exercise a warrant?

A

Can be sold for cash

It will expire

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11
Q

What is the taxation on the fund if HMRC approved?

A

Corporation tax on unfranked income

No corporation tax on franked income

No corporation tax on gains

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12
Q

How does an IT gain approval from HMRC?

A

Not be a close company - under control of 5 or less persons

UK resident and listed on a regulated market

Income must derived wholly/mainly from shares or securities, at least 70% of income

Distribute 85% of gross income

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13
Q

What is the taxation on an investor of an Investment Trust?

A

Same as equities

CGT

Dividend taxation

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14
Q

How many classes of shares does a split capital Trust have and what are they?

A

2

Income shares

Capital shares

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15
Q

What does a income share holder of an split capital investment trust receive?

A

Most of the income

Pre-agreed amount of capital at redemption (if sufficient assets) either of following:

    * Fixed - often original share price
   * Annuity - high income, negligible redemption amount
   * Income and residual - potential for surplus capital
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16
Q

What do holders of capital shares in an Investment Trust receive?

A

No income

Entitled to remainder of capital upon liquidation

17
Q

Why are capital shares considered higher risk?

A

Rank behind other investors on liquidation

18
Q

How long does a split capital investment trust typically last for?

A

5-10 years

19
Q

What does the hurdle rate of a split capital investment trust show?

A

Shows the amount of growth that needs to be achieved to meet original target for that share class

20
Q

What does negative hurdle rate mean?

A

Fund can reduce in size and still meet its original objective

21
Q

Which is higher risk a high hurdle rate or a low or negative one?

A

Higher hurdle rate

22
Q

Compared to OEICS/UT what are the advantages of Investment Trusts?

A

Charges are often lower

May be purchase at discount to NAV

Gearing may enhance profit

Priced in real-time on stock exchange (rather than once per day)

Wider range of permitted investments

23
Q

What are the disadvantages of Investment Trusts compared to OEICS/UT?

A

Can’t be UCITS investments

Gearing may increase losses

May be less liquid

Discount may widen

No FSCS protection

Stamp duty reserve tax

Market makers spread

Brokers commission

24
Q

What is the diluted NAV?

A

Value if all outstanding warrants and convertible loan stock are exercised

25
Q

How can closed ended funds respond to liquidity crisis

A 
Borrow
Sell properties
Move to discount/match buyers and sellers
Suspend dealing
Rights issue

1. AF4 (21 decks)

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