OEICS and Unit Trusts

Question 1

What is the set up of an OEICS?

Answer 1

As companies

Own corporate code separate to Companies Act

Authorised Corporate Director (ACD) and depository

Question 2

What is the set up of a Unit Trust?

Answer 2

Trust fund is legal owner of underlying assets

Legally binding trust deed

All decisions for benefit of investors

Question 3

What does open ended mean?

Answer 3

Shares/units can be created/cancelled dependent on demand

Size of fund constantly changing

Question 4

How is an OEIC priced?

Answer 4

Single price based on underling fund value

Not based on supply and demand

Daily pricing - mid market price

Question 5

How is a Unit Trust priced?

Answer 5

Previously bid/offer spread - now single price

Daily pricing as per OEICS - mid market price

Adjusted for income/charges

Question 6

What is the taxation on the fund for UT & OEICS

Answer 6

If authorised not subject to taxation on any gain

Income taxed at source no further tax

Unfranked income - pays tax at 20%

Can deduct management expenses when calculation tax on unfranked income

Question 7

How is the investor of a UT/OEIC taxed on gains?

Answer 7

Subject to normal CGT regime on disposal

Question 8

How is the investor of a UT/OEIC taxed on income?

Answer 8

If fixed interest fund - income payable taxed as interest subject to normal income tax treatment of savings income

Other UT/OEICs = paid in form of dividend and subject to normal dividend tax treatment

Question 9

What is equalisation?

Answer 9

Investors purchase at price that reflects income accrued since last distribution

When investor then received income - part of it has already been purchased - capital part

No income tax on the capital part of the payment - represents partial refund of capital

Deduct from acquisition cost for CGT

Question 10

What are the 3 types of authorised fund?

Answer 10

UCITS schemes

Non-UCITS retail schemes

Qualified Investor Scheme (QIS)

Question 11

What is a UCITS scheme?

Answer 11

Meets criteria of the European Directive:

Undertakings for Collective Investments in Transferable Securities

Must be open ended

Can be marketed across EU borders

Question 12

What is a non-UCITS scheme?

Answer 12

Do not meet UCITS criteria - can only be marketed to UK investors

Question 13

What is QIS

Answer 13

Can only be promoted to professional investors or very experienced investors

Question 14

What are the diversification requirements for a UCITS retail scheme?

Answer 14

Max 10% of fund value in any one investee company

Can only exceed 5% of fund value in 4 different companies

Means:
4 up to 10%
Rest max 5%

Min 16 funds

Exception for replicating tracker fund - one company investment up to 20% or exceptionally 35%

Question 15

What is a UCIS?

Answer 15

Unregulated collective investment scheme (UCIS)

Not been authorised by FCA and can’t be marketed to UK retail investors, professionals only

Not subject to limitations on investment powers (apart from restrictions in the trust deed)

May not be covered by FSCS

Question 16

What is the max exposure to unlisted securities/non approved securities in a UCITS OEIC?

Answer 16

10% of fund

Question 17

How many sectors in fund classification, what are the Investment Association sector definitions and what % of assets must be in each sector to qualify?

Answer 17

Over 30

Capital Protection
Income
Growth
Outcome targeted

80%

Question 18

What features must the market a UT/OEIC is looking to invest in have?

Answer 18

Liquid
Regulated
Operating regularly
Recognised
Open to the public

Question 19

What are the borrowing rules for retail UCITS?

Answer 19

10% of fund value only on a temporary basis

Non-retail can borrow same but doesn’t have to be temporary

Question 20

What are the responsibilities of the Unit Trust Manager?

Answer 20

Day to day running
Manage in line with regulations, deed and scheme particulars - for AMC
Promotion. advertising, investment selection and administration of fund
Authorised to conduct investment business
Have adequate financial resources
Supply information to trustee on request
Maintain record of units

Question 21

What are the trustees responsibilities of a Unit Trust?

Answer 21

They are legal owners
Regulated by FCA
Must be independent from management group
Ensure investors are protected
Hold and control the assets
Monitor managers actions
Keep register of unit holders 
Distribute income

Question 22

What is ACD of an OEIC responsible for?

Answer 22

Compliance with investor protection
Investment management
Shareholder register
Management day to day
Account preparation

Question 23

What is the independent depositary of an OIEC responsible for?

Answer 23

Overseas management -pricing, dealing etc

Checks ACD carries out it’s investment and borrowing powers correctly

Question 24

What is a dilution levy for an OEIC?

Answer 24

Applied where large inflows and outflows occur to cover dealing costs

Paid into fund not to manager in order that other investors are not disadvantaged

Question 25

What is a fund of funds?

Answer 25

Invests in funds managed by other managers
Fettered = funds run by same mgmt. group
Unfettered = funds from entire market place

No CGT on switch between funds

Question 26

What is Manager of Managers funds?

Answer 26

Each asset class has own external manager

Overall manager - appoints, asset allocation and monitors

Question 27

What is the taxation on investor of Reporting Funds (overseas)?

Answer 27

Income = same as UK funds accumulated as well as distributed income

normal CGT

Question 28

What is the taxation on investor of Non-Reporting Funds (overseas)?

Answer 28

Gains subject to income tax not CGT

Tax only paid on distributed income

Question 29

How can OEICS protect other investors against large outflows and or liquidity crisis?

Answer 29

Move to weekly valuations
Apply fair value pricing
Apply dilution levy
Apply fund dealing suspension

Additional for liquidity issues:
Sell properties - forced sale
Borrow to fund redemptions