Other Investment Classes Flashcards
Give the main characteristics of collective investment schemes.
Give investors the opportunity to achieve a wide spread of investments
Benefit from specialist management expertise (otherwise only available to large institutional investors)
Give an explain the two types of CISs
Close-ended schemes
Fund is closed to new money after initial tranche has been invested
Eg. Investment trust
Open-ended schemes
Managers can create or cancel units in the fund as new money is invested or disinvested
Eg. Unit trust
Regulation that CISs could cover
The categories of assets that can be held
Whether unquoted assets can be held
The maximum level of gearing
Any tax relief available
Key features of investment trust
Stated investment objective
Key parties involved: board of directors, investment managers and shareholders
Investors buy shares in an investment trust company, which are priced by supply and demand
Share price often stands at a discount to NAV per share
The funds are closed-ended
They are public companies (so governed by company law)
Gearing is allowed
Key features of unit trusts
Stated investment objective
Key parties involved: trustees (eg. an insurance company or bank), the management company (including investment managers) and unitholders
Investors buy units which are priced at NAV per unit
Open-ended
They are trusts (so governed by trust laws)
Limited power to use gearing (borrowing)
Open-ended investment company
Similar to
investment trusts in terms of corporate governance
but have
open-ended characteristics like unit trusts
Differences between closed-ended and open-ended funds
Investments in closed-ended funds are less marketable than the underlying assets, whereas marketability of investments in open-ended funds is guaranteed by managers
Closed-ended funds can gear, leading to extra volatility
Open-ended funds have limited power to gear
It may be possible to buy assets at less than the NAV in a closed-ended fund
The increased volatility of closed-ended funds implies a higher expected return
Shares in a closed-ended fund are also more volatile than the underlying assets because the size of any discount to the NAV can change. The volatility of units in an open-ended fund should be similar to that of the underlying assets
There may be uncertainty as to the true level of NAV per share of a closed-ended fund, especially if the investments are unquoted
Closed-ended funds can invest in a wider range of assets
They may be subject to different tax treatment
Advantages of CISs compared with direct investment
Access to expertise
Diversification
Some of the direct costs of investment are avoided
Holdings are divisible
Possible tax advantages
Market may be better than that of the underlying
Disadvantages of CISs compared to direct investment
Loss of control
Management charges incurred
May be tax disadvantages
Reasons for investing overseas
To match liabilities in the foreign currency
To increase the expected return (might be more applicable to emerging markets)
To reduce the risk by increasing the level of diversification
Drawbacks from investing overseas
Different market performance to the home market and therefore mismatching risk
Currency fluctuation risk
Cost of obtaining expertise
Additional administration functions: custodian, dividend tracking and collection
Possible tax disadvantages, eg. Withholding tax
Different accounting practices
Lack of good quality information
Language problems
Possible time delays
Poorly regulated markets
Political risks (eg. Confiscation of assets from foreigners)
Possible lack of liquidy
Restriction on ownership of certain shares by foreign investors
Indirect overseas investment examples
Multinational companies based in the home market
Collective investment schemes specializing in overseas investment
Derivatives based on overseas assets
Emerging markets characteristics
It is the stock markets in countries with developing economies.
Can offer high growth rates with possible market inefficiencies, giving investors the chance to make very big gains (or losses)
Economies and markets of smaller countries are less interdependent than those of the major economic powers, resulting in good diversification
Factors to consider before investment in emerging markets
Current market valuation
Possibility of high economic growth rate
Currency stability and strength
Level of marketability
Degree of political stability
Market regulation
Restrictions on foreign investment
Range of companies available
Communication problems
Availability and quality of information
