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Investment Environment > Objectives of Funds > Flashcards

Objectives of Funds Flashcards

1
Q

What are the largest institutional investors?

A

Pension funds (great emphasis on this in the exam), followed by insurance companies, collective investment schemes (unit trust) and private trust companies

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2
Q

What factors effect fund risks?

A
  • Similar to factor effecting individual risks
  • Time horizon, liquidity needs, tax obligation, legal structures, ethical investing
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3
Q

What document is fund objectives written in? (3)

A
  • Trust deeds
  • KIIDS/KIDS
  • Statement of investment principles (SIPs) for pension schemes
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4
Q

What funds have the objective of maximising return? (3)

A
  • Investment Trust Company e.g. HICL
  • Defined contribution pension scheme
  • Collective investment schemes
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5
Q

What funds seek to minimise liabilities? (3)

A
  • Life assurance
  • Defined benefit pension scheme
  • General insurance
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6
Q

What is the difference between secondary and money market instruments? (2)

A
  • 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
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7
Q

What is UCITS and what does it regulate? (2)

A
  • Undertakings for Collective Investment in Transferable Securities
  • Regulates Collective Investment Schemes throughout EEA
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8
Q

How is UCTIS III split? (2)

A
  • Management Directive
  • Product Directive
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9
Q

Outline UCITS IV (3)

A
  • Came into effect in 2011
  • To promote greater efficiency in Pan-European management funds
  • Master feeder structure - EoS across borders
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10
Q

What is the UCITS criteria? (3)

A
  • Must apply to be passported from its home state regulator to operate in EEA member state
  • Must be open ended
  • Must follow UCITS regulation
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11
Q

What is AIFMD? (3)

A
  • 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
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12
Q

What is an alternative investment fund? (2)

A
  • Has collective undertaking in hedge funds, PE funds, retail investment funds, investment companies and real estate funds
  • Not subject to UCITS
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13
Q

When do AIFs require authorisation from home regulator? (3)

A
  • 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
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14
Q

What does the FCA require from authorised fund mangers? (3)

A
  • 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

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15
Q

What is the criteria for assessing the value of assets by AFMs? (6)

A
  • Customer service
  • Fund performance
  • Authorised fund manager costs
  • Economies of scale
  • Comparable market rates
  • Asset class
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16
Q

What are the features of pension funds? (3)

A
  • Contributions are tax free
  • Income and gains within the fund are tax free
  • Income once drawn is taxable
17
Q

What is a stakeholder pension?

A
  • 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
18
Q

What type of occupation pension schemes are there?

A
  • Defined contribution scheme
  • Defined benefit scheme
19
Q

What is a defined contribution scheme? (3)

A
  • Company contributes a certain amount on the employees behalf
  • Objective is to maximise returns
  • Returns determine the pension paid
20
Q

What is a defined benefit scheme? (3)

A
  • 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
21
Q

What is the Pension Act 2008? (2)

A
  • 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
22
Q

Who appoints the investment manager for a pension fund?

A
  • Trustee must ensure that the investment manager adheres to the regulations and objectives of the fund
23
Q

What must a pension statement of investment principle (SIP) include? (6)

A
  • 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
24
Q

Who approves workplace pension schemes?

A
  • HMRC Pensions Scheme’s Office
25
Q

What’s the objectives of the pensions regulator? (3)

A
  • Protect the benefits of members of work based schemes
  • Reduce risks of situations requiring compensation from the Pension Protection Fund
  • Promote good administration
26
Q

Who protects against pension losses?

A

Pension Protection Fund

27
Q

How do pension regulator collect information?

A
  • 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
28
Q

What warnings can the pensions regulator issue? (3)

A
  • Contribution notices
  • Financial support direction
  • Restoration order
29
Q

What is the statement of funding principles by trustees? (3)

A
  • Obtain regular contribution valuations
  • Prepare a schedule for contributors
  • Effective recovery plan when there is shortfall
30
Q

What is the Pension Protection Fund? (4)

A
  • 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
31
Q

What is the investment strategy of pension funds? (2)

A
  • 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
32
Q

What is the compensation issued by the Pension Protection Fund? (2)

A
  • Up to 100% of benefits to those retired
  • Up to 90% of benefits to those who have not yet retired
33
Q

What are the different type of Life Insurance policies? (4)

A
  • 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
34
Q

What are is general insurance? (4)

A
  • Covers against general problems e.g. car insurance, contents insurance, pets
  • Typically short term investment horizon - highly liquid
  • Low tolerance to risk
  • Solvency requirements
35
Q

Which funds have a long term and less liquid objective?

A
  • Young defined benefit scheme
  • Life assurance company (no need for real returns but nominal returns)

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