Other Investments

Question 1

Ideas on open-ended scheme

Answer 1

Creates/cancels units when purchase/sell
Limited capacities to take out debt
Higher charges from higher overheads and flexibility
Example: Unit trust

Question 2

Ideas on close-ended schemes

Answer 2

Need to find willing seller/buyer for the shares
May trade below or above NAV depending on supply vs demand of shares
More investment freedom as may hold less liquid assets
Take out debt to provide significant gearing on returns

Example: investment trusts

Question 3

Reasons for investing overseas

Answer 3

Match liabilities in foreign currency
Increase the expected returns
reduce concentration of risks by increasing the level of diversification

Question 4

drawbacks on overseas market

Answer 4

Mismatching risk from different market performance
Currency fluctuations
Tax disadvantages
Borrowing costs are higher
Difficult and expensive to hedge overseas bond payments for long periods
Cost of obtaining expertise
Different accounting practices
Language problems

Question 5

What are exchange-traded options and OTC options? Why exchange-traded options are better?

Answer 5

Exchange-traded options are standardized products with little specification
OTC options are specialized and unique

Lower credit risk
Daily mark-to-market for valuations
Daily quoted prices
Better marketability
Easier to close out

Question 6

Ads and disads choosing indirect property investments

Answer 6

Advantages:
Economies of scale
More flexible and more marketable
provides better diversification
Unit price/share price regularly available, easier valuations
Automatically obtain management expertise
property shares can be bought at a discount
Disadvantages:
return is uncertain as direct property is valued infrequently
exposure is on other types of property
don’t provide much diversification from the share investment
Management company would need to make profits

Question 7

what it means for shares of investment trust to be traded below NAV? Possible reasons for it?

Answer 7

What is means
means that the market capitalization is lower than the value of the underlying investments held

Why it might be happening
may be out of favour from corporate or management issues
may be general fall in equity markets
expenses and running costs need to be allowed
paying for management skills
shares may be illiquid
loss of control over underlying assets
tax differences between holding shares and those of underlying companies
unrealised capital gains tax
valuing of underlying companies is uncertain
governance considerations