March 2023 Flashcards
Identify six main risks of investing in a global emerging markets equities fund and provide one reason for each (12 marks)
• Currency
• Adverse exchange rate movement
• Economic
• Different stage of business/economic cycle at same time
• Concentration
• Index composition
• Political
• Political decisions/instability.
• Liquidity
• May not be able to divest quickly
• Governance/legal/regulatory
• Lower accounting standard/less transparency/less corporate governance.
• Manager
• May not have local knowledge/experience in geography.
Options available at maturity of index-linked savings certificates (3 marks)
• Renew at a new term of same length.
• Renew at a new term of different length.
• Cash it in.
Explain how maturity value of index linked savings certificate is calculated (4 marks)
• The original value;
• plus, interest;
• plus, inflation.
• using CPI.
Identify four main benefits of investing in NS&I products (4 marks)
• No market risk.
• Accessible/highly liquid/deposit-based.
• Guaranteed/government backed/low default risk;
• without limit/above £85,000/FSCS limit.
• No charges.
Outline tax treatment of NS&I green savings bond
• All/3 years’ interest;
• taxable
• at maturity/end of term.
• Taxed as savings/income tax/PSA not available.
Describe the main characteristics of a value based investment style (7 marks)
• Bottom-up;
• uses fundamental analysis to find;
• stocks that are under-valued/out of favour/mis-priced.
• Low P/E;/P/B;
• or high dividend yield.
• Potential for re-rating/mean reversion.
• Often contrarian.
• Long-term view.
Explain why to use TWR instead of MWR (3 marks)
• Better for comparing funds.
• Not influenced by cash flow/timing;
• as outside of manager control.
• Focuses on individual manager/performance.
• TWR compounds multiple sub-periods/shows change over entire period.
Describe briefly the main functions of the ACD in an OEIC (4 marks)
• Compliance and regulatory reporting.
• Responsible for pricing/valuations.
• Appoints/oversees manager.
• Buys/sells shares.
• Maintains shareholder register.
• Maintains liquidity/imposes dilution levy.
• Prepares accounts.
Describe main functions of a depositary in an OEIC (4 marks)
• Acts as custodian;
• safeguards assets.
• Collects/pays income distributions.
• Monitors ACD;
• on investment/borrowing limits.
• Deals with any wind-up of fund.
Explain briefly the tax treatment of dividends from a VCT and SEIS (3 marks)
VCT
• Tax-free
SEIS
• Dividend allowance available/ first £500 taxed at 0%.
• 8.75% / 33.75% / 39.35%.
Explain reinvestment relief into a SEIS (3 marks)
• 50% of gain;
• exempt;
• up to maximum £100,000.
• Must receive/qualify for Income Tax relief.
Explain disposal relief of an SEIS (3 marks)
• Gain exempt;
• if shares held for/after 3 years.
• Must have qualified for Income Tax relief/relief not withdrawn.
• Applies to loss or gain/loss relief.
What does a positive information figure mean? (4 marks)
• Manager has added value/outperformed;
• on risk-adjusted basis;
• and consistently;
• against benchmark.
Outline the main benefits offered by segmentation (5 marks)
• Can encash whole segment/segments in full/all segments.
• May keep Syed as BRT/prevents HRT/maximises any top-slicing.
• Defers gains/chargeable event for longer.
• Takes into account investment performance/actual gain or loss.
• Can reduce chargeable gains/more tax efficient.
• Can assign/gift segments.
Describe the regular withdrawal facilities of bonds (6 marks)
• Up to 5% pa;
• of original investment/£75,000
• Cumulative/unused 5% carried forward.
• Deemed as return of capital.
• Tax-deferred;
• to 20 years/surrender/death.
• Corporation Tax paid internally.
• 20% BRT deemed paid/additional 20% if becomes HRT.
Describe basic principle and objective of top slicing relief (4 marks)
• Divides excess/gain;
• by number of policy years;
• in order to give average yearly gain;
• in order to reduce/mitigate;
• higher rate tax liability/keep Syed as basic rate taxpayer.
Identify main differences between unfettered fund of funds and manager of managers fund (4 marks)
• FoF is multiple funds/MoM is single fund.
• FoF has additional charges/layer of AMC/MoM does not.
• FoF has to sell the fund/ MoM switches only manager.
• FoF has no control over mandate /MoM has more control.
• FoF is less transparent/MoM is more transparent.
• FoF affected by capacity/MoM does not impact external manager’s capacity.
State the main components part of the UK currents account (4 marks)
• Goods/visible trade.
• Services/invisible trade.
• Plus investment income/primary income/overseas earnings;
• transfer payments/secondary income/capital and asset movement.
State the main component part of the UKS capital account (3 marks)
• Foreign investments/ assets.
• Foreign loans/borrowings.
• Foreign currency/reserves.
Describe three ways in which a current account deficit can be balanced out (3 marks)
• Met by capital account surplus.
• Foreign investments/loans.
• Sale of foreign currency reserves.
• Central bank intervention.
Explain limitations of relying on dividend cover and yield when considering income needs (6 marks)
• Dividend info is historical/income need is for future.
• Dividend cover is low/dividend is at risk/not sustainable.
• Dividend not fixed/can change.
• Can be distorted by other/one-off factors.
• Will be affected/reduced by share buybacks.
• Dividend subject to dividend rate of tax/
dividend tax rate can increase.
• Focuses on/ignores capital value.
Comment on a high dividend yield (3 marks)
• Yield is high
• affected by share price.
• May appear attractive/value trap.
• Dividend may be supported by borrowing/paid from reserves.
Eight main factors that could affect share price (8 marks)
• Economic outlook/stage of economic cycle.
• Changes in legislation/regulation.
• Change in sector sentiment/competition/business risk.
• Corporate event/profit warning/guidance/dividend cut.
• Investor or market sentiment/broker or credit rating change.
• Takeover speculation/activity.
• Change in/bad management.
• Accounting issue/fraud/scandal.
• Inclusion/removal from an index.
Three advantages of owning direct equity over collective (3 marks)
• Greater potential growth/no loss of return through diversification.
• No on-going costs/AMC.
• Greater control/involvement/voting rights.
• Direct link between share price and return/can trade real time.
Explain main objectives of rebalancing process (6 marks)
• Realign/return portfolio to original;
• asset allocation/weighting;
• to match AtR/CfL.
• Correct portfolio style/drift.
• Take profits/sell outperforming funds.
• Top up/buy underperforming funds.
• Invest inflows/new money.
• Maintain/increase cash.
• Ensure income can be maintained/is sustainable against target.
• Utilise tax allowances.
