Part 4 Flashcards

1
Q

Prime property scores highly on

A
  • Location
  • Age and condition
  • Quality of tenant
  • Number of comparable properties
  • Lease structure
  • Size
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2
Q

Flaws of Direct Property holdings:

A
  • Size: many properties are too large for most investors to afford
  • Diversification: many properties are needed to create a well-diversified property portfolio. The size of each investment might make this impractical for smaller funds and individual investors.
  • Lack of Marketability: the time and costs associated with buying and selling make properties unmarketable.
  • Valuation: property values are never known until sale. Estimates of values can be expensive.
  • Expertise needed: much of the profit to be made through property investment comes through detailed local knowledge. Many investors will not have the specialist expertise.
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3
Q

Property shares stand at a discount to their underlying estimated NAV. The discount to NAV reflects:

A
  • Possible capital gains tax on liabilities
  • Market valuation of holdings differing from the valuations underlying the NAV – this arises because of the lack of current quoted prices on property, with valuations being subjective and based on historic information
  • Risk of loss on forced sale – cashflow requirements result in property companies being more likely to be forced sellers of properties than institutions undertaking direct property investment on their own account.
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4
Q

A smaller discount, or possibly even a premium, to NAV is possible where:

A
  • The market has a positive view of developments giving the potential for capital gains
  • The valuations underlying the NAV are conservative
  • The property company has a good management track record.
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5
Q

Main features of OEICs:

A
  • They are companies governed by company law, as opposed to trusts, like investment trust companies. However, they can create and cancel share capital at will – i.e. they are open-ended like unit trusts
  • They have limited powers to borrow (i.e. gearing)
  • A single company can offer several different funds. Only one corporate structure is required, however, unlike unit trusts where each fund has a separate status (as a trust). Thus the investor first chooses which OEIC in which to invest and then chooses the fund or funds within that OEIC in which to invest.
  • This should reduce the management costs as compared to unit trusts – i.e. as part of the management costs are effectively spread over several funds.
  • The restrictions on the assets in which OEICs may invest are the same as for unit trusts – i.e. in tradable securities as defined under a European directive.
  • There is a single price for both buying and selling, which is equal to the net asset value of the underlying investments. All charges and commissions are shown / deducted separately. This offers greater transparency to investors.
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6
Q

Differences between closed-ended (investment trusts) and open-ended (unit trusts) funds:

A
  • The marketability of the shares of closed-ended funds is often less than the marketability of their underlying assets. The marketability of units in an open-ended fund is guaranteed by the managers.
  • Gearing of closed-ended funds can make the shares more volatile than the underlying equity. Most open-ended funds cannot be geared and those that can may only be geared to a limited extent. This increases the volatility of closed-ended funds means that they should provide a higher expected return.
  • Shares in closed-ended funds are also more volatile than the underlying equity because the size of the discount can change. The volatility of units in an open-ended fund should be similar to that of the underlying assets.
  • At any point in time there may be uncertainty as to the true level of net asset value per share of closed-ended funds, especially if the investments are unquoted.
  • Management charges are usually higher for open-ended funds than closed-ended funds.
  • Closed-ended funds may be able to invest in a wider range of assets than unit trusts.
  • It may be possible to buy assets at less than the net asset value in a closed-ended fund.
  • They may be subject to tax at different rates.
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7
Q

Differences between Indirect vs. direct investment:

A
  • Control
  • Diversification
  • Expertise and specialisation
  • Expenses
  • Marketability
  • Taxation
  • Expected returns and risk
  • Gearing
  • Discount to NAV
  • Volatility
  • Individual investment products
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8
Q

Advantages and disadvantages of collective investment vehicles/schemes:

A

Advantages (greater for small investors than for large ones):
• They are useful for obtaining specialist expertise
• They are an easy way of obtaining diversification
• Some of the costs of direct investment management are avoided
• Holdings are divisible – part of a holding in any particular trust can be sold
• There may be tax advantages
• There may be marketability advantages ( but they may also be less marketable than the underlying assets)
• They can be used to track the return on a specific index (index tracker funds)

Disadvantages:
• Loss of control – the investor has no control over the individual investments chosen by the managers
• Management charges are incurred
• There may be tax disadvantages such as withholding tax, which cannot be reclaimed

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9
Q

Why invest overseas

A
  • Match liabilities by currency
  • Diversification
  • Greater return
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10
Q

Why would overseas investments have greater returns

A
  • Undervalued markets
  • Strengthening currency
  • Higher risk or fast-growing economies
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11
Q

Drawbacks of overseas investments

A
  • Liabilities mismatched by currency
  • Currency movements cause additional volatility
  • Cost of obtaining expertise
  • Cost of/need to appoint overseas custodian
  • Additional administration
  • Repatriation problems
  • Different accounting standards/methods
  • Lack of good quality information
  • Language problems
  • Possible time delays
  • Poorly regulated markets and political instability
  • Political risks
  • Possible lack of liquidity and quality information
  • Restrictions on ownership of certain shares by foreign investors
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12
Q

Indirect overseas investment may involve investing in

A
  • Multinational companies based in the home market
  • Domestic companies with sufficient export trade
  • Collective investment schemes specialising in foreign investment
  • Derivatives based on overseas assets
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13
Q

Factors to consider before investing in emerging markets

A
  • Current market valuation
  • Possibility of high economic growth
  • 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
  • Withholding taxes that apply
  • Expertise in the market
  • Extra cost, eg custody fees
  • Extent of additional diversity generated
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