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
2
Q
What factors effect fund risks?
A
- Similar to factor effecting individual risks
- Time horizon, liquidity needs, tax obligation, legal structures, ethical investing
3
Q
What document is fund objectives written in? (3)
A
- Trust deeds
- KIIDS/KIDS
- Statement of investment principles (SIPs) for pension schemes
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
5
Q
What funds seek to minimise liabilities? (3)
A
- Life assurance
- Defined benefit pension scheme
- General insurance
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
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
8
Q
How is UCTIS III split? (2)
A
- Management Directive
- Product Directive
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
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
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
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
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
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
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
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
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
26
Who protects against pension losses?
Pension Protection Fund
27
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
28
What warnings can the pensions regulator issue? (3)
- Contribution notices
- Financial support direction
- Restoration order
29
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
30
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
31
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
32
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
33
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
34
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
35
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
