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AFA > Investments Topic 10 - OEICs, Unit Trusts and Investment Trusts > Flashcards

Investments Topic 10 - OEICs, Unit Trusts and Investment Trusts Flashcards

1
Q

What is UCITS

A

Undertakings for Collective Investments in Transferable Securities (UCITS)
UCITS is designed to enable cross-border marketing, and AIFM covers the fund managers of those funds not authorised as UCITS.

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2
Q

Key features of unit-trusts:

A
  • 3 required roles – trustee, depositary and fund manager
  • Unit trust created under a trust deed, and manager has a clearly defined mandate for their investments and borrowing powers
  • Fund is divided into units, each unit representing an equal fraction of the trust’s total assets
  • 4 unit prices – creation price (the price at which trustee creates units) offer price (price at which investors buy units) bid price (lower price at which manager buys back units) cancellation price (lower than bid price for buying back units if there is little hope of selling them short term – this is rarely used)
  • Unit trust is open-ended
  • Manager obliged to buy back units
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3
Q

Unit Trustee duties include

A
  • Hold and control assets
  • Approve proposed advertisements and marketing material
  • Collect and distribute income from trust assets
  • Issue certificates to investors
  • Supervise the maintenance of the register of unit holders
  • Ensure manager complies with the trust deed
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4
Q

Unit trust depositary duties include

A
  • Oversight of sale, issue, repurchase, cancellation and pricing of units
  • Carry out instructions of fund manager
  • Ensuring money involved in fund’s assets are remitted in a timely manner and income is applied correctly
  • Monitoring cash flows concerning fund’s assets
  • Safekeeping fund’s financial instruments in custody and verifying other assets
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5
Q

Unit trust fund manager duties include

A
  • Managing the fund
  • Valuing assets of the fund on a daily basis
  • Setting price of units
  • Offering units for sale
  • Buying back units from holders who wish to sell
  • Generating profit from management fees and dealing in the units
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6
Q

What are clean funds

A

Investor’s must now clearly state their fees and invoice a platform or advice fee to investors. These charges must be left separate now to the rest of the fund’s charges. These are called ‘unbundled’ or ‘clean’ funds

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7
Q

Main fees of a unit trust

A
  • Initial charge
  • Annual management charge
  • Ongoing charges figure (OCF)
  • Trust and depositary fees
  • Custodian fees
  • Auditor’s fees
  • Tax adviser fees
  • Legal adviser fees
  • Registrar’s fees
  • Regulatory fees
  • Other operating costs
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8
Q

What is an equalisation payment

A

This means that new investors will buy their unit + the value of the income received.

Upon the next income payment, the unitholder will receive payment in 2 forms:

  • An equalisation payment, which is a repayment of the dividend that was bought upon purchasing the unit, this is not taxed
  • A dividend payment, which is the latest dividend payable, taxed as usual
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9
Q

Key features of an OEIC:

A
  • Established under company law, not trust
  • 2 roles – depositary and authorised corporate director
  • Clear mandate, defined in the prospectus
  • Open-ended, shares not units
  • May be structured as an umbrella company
  • Value of each share directly related to underlying assets
  • Manager obliged to buy-back shares
  • Share prices are 1 price, but managers can charge a fee on top
  • Must arrange annual general meeting (AGM)
  • Equalisation payments can be made for first payment
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10
Q

The depositary

A

similar role to unit trust trustee as they hold assets, ensure manager meets criteria and administers fund assets.

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11
Q

Authorised corporate director is responsible for:

A
  • Managing investments
  • Buying and selling OEIC shares
  • Ensuring price of shares reflects the underlying NAV
  • Other regulatory functions
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12
Q

Charges to an OEIC:

A

Initial charge
* Shares are single priced
* OEIC will levy an initial charge, usually 3-6% of the value of the investment
* Charge taken when the money is deposited

Annual management charge
* Deducted based on the value of the fund
* 0.5%-1.5%

Anti-dilution levy

  • Can be enforced where a large amount of money comes in/out of the fund at the same time
  • Designed to protect the interests of other investors
  • Added to buying price or deducted from selling price
  • Similar to unit trust cancellation price

Ongoing charges figure
* All reoccurring charges to the OEIC
* Must be shown to everyone
* Based on costs to the manager and the investments made

Total expense ratio (TER)
* Similar to OCF
* Includes annual management charges and additional ongoing costs, but no performance fees or one-off charges

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13
Q

Forward pricing

A

investor will buy units which are set at the next valuation. Estimated pricing is used so that investor’s do not exploit an undervalued unit/share price before the real purchase price is used.

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14
Q

Key features of dealing in unit trusts and OEICs

A
  • Lump-sum (Min. £500-£1000) or contributions (Min. £25-£50)
  • Can be done through FA, fund supermarket, directly via internet, telephone or post
  • Same rules apply to all ways of signing up
  • Statutory cancellation notice is 14 days
  • Money returned from cancellation is lower to protect other investors
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15
Q

Share exchange

A

when fund managers take investor’s current shareholdings and either use them directly in the funds’ investments or sells them on behalf of the investor and invests the proceeds into the fund. CGT still liable for disposal of shares.

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16
Q

Unit trust and OEIC management can be divided into 2 styles

A
  • Passive management – manager uses tracker index or benchmark, no big decisions made, manager fees low
  • Active management – manager makes day-to-day decisions, buys and sells shares, additional costs occur
17
Q

Tracker funds

A
  • Aims to track the performance of stock market index
  • Doesn’t need active management
  • 3 types of tracking – full replication, stratified sampling and optimisation
  • Tracking error – degree of accuracy with which a fund tracks the index
18
Q

Fund of funds (FoF)

A
  • Where fund managers invest into other funds
    Mandate established then manager invests in other similar unit trusts
  • Can be fettered – which is when it can only invest in internal funds offered by the ‘host’ provider
  • Can be unfettered – when it can invest in external funds offered by external companies
  • Typical annual management charge of 0.75% as well as the fees of each individual fund.
19
Q

Multi manager funds

A
  • Also called manager of manager funds
  • Manager has contracts with multiple other portfolio managers
  • These managers will create a portfolio in line with the mandate
  • Fund manager must oversee everything and ensure all other managers are staying in line and regular check-up on investments
20
Q

Total return funds

A
  • Look to produce long-term positive returns by holding long positions
  • Invest in securities, commodities or derivatives
  • Usually benchmarked against cash and normally + a % on top (but also minus any fees)
  • These have relatively low charges
  • Funds invest in a broad range of assets
  • Likely to move into defensive assets when stock markets are falling
21
Q

Absolute return funds

A
  • Aims to achieve returns with minimal volatility by using hedge techniques – derivatives
  • Invests in futures, options, warrants and contracts for differences as well as conventional vehicles
  • Unlike total return fund, this looks to produce positive annual returns against a cash benchmark
22
Q

Absolute return fund strategy in steps:

A
  1. Buy and hold portfolio of assets (long-hold for capital growth)
  2. Buying put options on some or all of the assets
  3. If manager loses money on the options, it can be lapsed and only the premium is lost, but offset against the capital growth
  4. Option will be arranged so that manager can settle deals in cash so they can hold onto shares
  5. This creates more risk, but can provide a return in a falling market
23
Q

For taxation purposes, unit trusts and OEICs are split into 2 categories:

A

Equity unit trusts/OEICs – those with less than 60% of assets in interest-bearing securities. These distribute income in the form of dividends.

Non-equity unit trusts/OEICs – those holding at least 60% in interest-bearing securities. These can be distributed as interest.

24
Q

How is risk managed in unit trusts and OEICs

A
  • Risk is spread through the diverse portfolio
  • Risk lowered through the professional fund manager
  • Investors can choose their level of risk
  • Depositary has oversight of manager to ensure all correct actions are being taken
25
Q

Offshore funds must be recognised by… if they want to be marketed in the UK. These are the 3 that are recognised:

A
  • The FCA

Undertakings for Collective Investments in Transferrable Securities (UCITS)
* Certain funds authorised in designated territories – these are countries that the FCA are satisfied that they offer the same level of investor protection as the UK
* Funds recognised individually by the FCA

26
Q

2 categories of offshore funds

In terms of the income

A

Reporting funds

  • All income reported – from investor and the fund itself
  • Funds reported whether they are distributed or accumulated
  • Reported through a set of accounts that conform to international reporting standards
  • Tax is the same as all onshore funds – income paid as interest or dividends and gains subject to CGT

Non-reporting funds

  • This is where management do not report any income, and investors report all income and gains upon realisation of the assets
  • When assets are sold, treated as offshore income gain but will be taxed as income
  • This means that the tax paid could be up to 45% rather than 20% for CGT
27
Q

Investment trusts

A

These are public limited companies, no longer a trust. They are listed on the stock market, and they invest in stocks, shares and sometimes property. The investors then buy shares of the investment trust through the stock market.

28
Q

Key features of investment trusts:

A
  • Offers professional investment management at low costs
  • Closed end, leading to S&D factors
  • Can borrow or gear without restriction
  • More flexibility than unit trusts and OEICs in terms of investments (unquoted private companies etc.)
  • As a company, they can hold back up to 15% of income in reserve, meaning dividends can be paid in the worst of times
  • Can run for a set term, and wind up on a predetermined date
  • Likely to specialise in certain sectors
29
Q

Split capital trusts

A

When an investment trust has more than one type of share. Usually incorporated for a fixed term.

30
Q

What are the types of share in a split capital trust in order of priority (to be paid out)

A
  • Prior charges – not shares, money that must be paid before capital is distributed, such as loan stock and debts.
  • Zero-dividend preference shares (or zeros) – offer a fixed capital return which is significantly higher than purchase price. Any gain is subject to CGT
  • Income shares – income from underlying assets paid as dividends. Usually have a stated repayment value. Pay a relatively high income but very low amount on redemption.
  • Ordinary income shares – provide both income and growth. Income distributed varies from trust to trust.
  • Capital shares – shareholders receive no income throughout the trust, but obtain all the capital left after everything else has been paid off
31
Q

Gearing

A

borrowing as a percentage of capital reserves

32
Q

Charges for investment trusts

A
  • Shares are single priced
  • Annual management charge between 0.25% and 1.5%
  • May be auditor’s fee and other additional costs
  • Annual fees usually taken from the trust’s income
  • Ongoing charges figure is total charges of running the investment, shown as percentage of the fund value
33
Q

Taxation of investment trusts

A
  • Gains within the fund exempt from CGT and CT
  • Dividend income from UK companies exempt from CT, known as ‘franked income’
  • ‘Unfranked income’ – income, rent and non-UK dividends are – are subject to CT
  • Dividends paid gross
34
Q

Differences between investment trusts and units trusts/OEICs

A
  • Investment trusts are stock market companies and have limited shares available, whereas OEICs and unit trusts can create new share on demand
  • This creates a problem for OEICs and unit trust when they need to sell assets urgently to pay-out an investor
  • This also put stress on managers for these 2 when new inflows of money come in, investment trusts do not have these issues
  • Investment trust investor scan sell their shares whenever they like, and although share price might fall a bit, they are not dependent on other investors for their assets to stay in the fund
  • Investment trust can borrow and gear more money
  • Investment trusts can hold back 15% of income to distribute more even income payments, unit trusts and OEICs must distribute all income
35
Q

Exchange traded funds (ETF)

A
  • Type of investment trust where shares or units are traded on securities exchange ior other trading venue
  • Most of these follow passive strategies (benchmarking, index linked)
  • ETF’s can deal in primary and secondary markets, by ‘authorised participants’ for primary and ‘over the counter’ clients for secondary
  • Dealings in the primary market are arranged by authorised participants and are newly issued shares of the ETF

AFA (38 decks)

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