Objectives of Funds Flashcards
What are the largest institutional investors?
Pension funds (great emphasis on this in the exam), followed by insurance companies, collective investment schemes (unit trust) and private trust companies
What factors effect fund risks?
- Similar to factor effecting individual risks
- Time horizon, liquidity needs, tax obligation, legal structures, ethical investing
What document is fund objectives written in? (3)
- Trust deeds
- KIIDS/KIDS
- Statement of investment principles (SIPs) for pension schemes
What funds have the objective of maximising return? (3)
- Investment Trust Company e.g. HICL
- Defined contribution pension scheme
- Collective investment schemes
What funds seek to minimise liabilities? (3)
- Life assurance
- Defined benefit pension scheme
- General insurance
What is the difference between secondary and money market instruments? (2)
- Short term time horizon e.g. general insurance/life assurance policies = liquidity is required. General insurance funds would invest in money market instruments e.g. gilts and treasuries (not bonds!)
- Long term time horizon means short term risk can be taken e.g. CIS will invest in shares, bonds, derivatives, ETFs
What is UCITS and what does it regulate? (2)
- Undertakings for Collective Investment in Transferable Securities
- Regulates Collective Investment Schemes throughout EEA
How is UCTIS III split? (2)
- Management Directive
- Product Directive
Outline UCITS IV (3)
- Came into effect in 2011
- To promote greater efficiency in Pan-European management funds
- Master feeder structure - EoS across borders
What is the UCITS criteria? (3)
- Must apply to be passported from its home state regulator to operate in EEA member state
- Must be open ended
- Must follow UCITS regulation
What is AIFMD? (3)
- Alternative Investment Fund Manager Directive
- The directive covers the management, marketing and administration of AIFs
- Focuses on regulating the manager, rather than the fund itself
What is an alternative investment fund? (2)
- Has collective undertaking in hedge funds, PE funds, retail investment funds, investment companies and real estate funds
- Not subject to UCITS
When do AIFs require authorisation from home regulator? (3)
- AUM is above €100m leverage finance
- AUM is above €500m unleveraged finance and does not give investors right to redemption within 5 yeas of initial investment
- AIFs that do not meet these thresholds are seen to be sub-threshold and lighter regulation applies
What does the FCA require from authorised fund mangers? (3)
- Assess the value for money of each fund
- Take corrective action if it does not offer good value for money
- Explain the assessment annually in a public report
*** COLL in FCA handbook
What is the criteria for assessing the value of assets by AFMs? (6)
- Customer service
- Fund performance
- Authorised fund manager costs
- Economies of scale
- Comparable market rates
- Asset class
What are the features of pension funds? (3)
- Contributions are tax free
- Income and gains within the fund are tax free
- Income once drawn is taxable
What is a stakeholder pension?
- Introduced in 2001
- A low cost pension alternative to self employed and middle income employees
- Employers are obliged to offer this unless they have other adequate arrangements in place for staff pensions
What type of occupation pension schemes are there?
- Defined contribution scheme
- Defined benefit scheme
What is a defined contribution scheme? (3)
- Company contributes a certain amount on the employees behalf
- Objective is to maximise returns
- Returns determine the pension paid
What is a defined benefit scheme? (3)
- A guarantee to pay a pension of a certain size once the employees retires
- Returns are known as actuarial returns
- Aim is to minimise liabilities - liability driven investment
What is the Pension Act 2008? (2)
- Those aged between 22 and state retirement age (66) who are earning above £10,000 and not on a pension scheme are automatically enrolled onto NEST
- National Employment Scheme
Who appoints the investment manager for a pension fund?
- Trustee must ensure that the investment manager adheres to the regulations and objectives of the fund
What must a pension statement of investment principle (SIP) include? (6)
- The investments to be held and the balance between different types of investments
- Risk and the expected return
- At what age investment will be realised
- Using the rights (including voting rights) attached to investments if they are not available
- ESG
- SIP must be reviewed and revisited at least every 3 years by trustee
Who approves workplace pension schemes?
- HMRC Pensions Scheme’s Office
What’s the objectives of the pensions regulator? (3)
- Protect the benefits of members of work based schemes
- Reduce risks of situations requiring compensation from the Pension Protection Fund
- Promote good administration
Who protects against pension losses?
Pension Protection Fund
How do pension regulator collect information?
- Through the scheme return
- Reports from whistleblowers
- Trustees and scheme managers are responsible for changes in scheme address, details of trustees, type of benefits provided
What warnings can the pensions regulator issue? (3)
- Contribution notices
- Financial support direction
- Restoration order
What is the statement of funding principles by trustees? (3)
- Obtain regular contribution valuations
- Prepare a schedule for contributors
- Effective recovery plan when there is shortfall
What is the Pension Protection Fund? (4)
- Compensation for pension schemes that cannot meet liabilities
- Up to 100% of benefits to existing pensioners
- Up to 90% of benefits to those not yet retired
- Funded by levy on all defined benefit pension schemes
What is the investment strategy of pension funds? (2)
- Age of the member is an important factor
- If fund members are older, then fund manager should consider moving to bonds and fixed interests securities - more liquid and income focused securities
What is the compensation issued by the Pension Protection Fund? (2)
- Up to 100% of benefits to those retired
- Up to 90% of benefits to those who have not yet retired
What are the different type of Life Insurance policies? (4)
- Term insurance policy - covers the life on an individual over a specific period (usually 10+ years) - in the event that a person survives the period, no payment is made
- Whole-of-life policy - covers the life of an individual and pays a capital sum on the individuals death when it occurs
- Endowment policy - combines savings and life insurance element - will pay a fixed sum in the event of death e.g. insurance covers mortgage on death
- With profits endowment policies - managed by life assurance companies, returns from bonuses rather than returns linked to the market
What are is general insurance? (4)
- Covers against general problems e.g. car insurance, contents insurance, pets
- Typically short term investment horizon - highly liquid
- Low tolerance to risk
- Solvency requirements
Which funds have a long term and less liquid objective?
- Young defined benefit scheme
- Life assurance company (no need for real returns but nominal returns)
Invest in equities, property, bonds
