Part 4 Flashcards
a “prime property” would score highly on the following factors
- location
- age and condition
- quality of tenant
- number of comparable properties available to determine the rent at rent review and for valuation purposes
- lease structure
- size
Running yield on a property
running yield = rental income (net of all management expenses) / cost of purchase (gross of all purchase costs)
Property marketability
Property is very unmarketable. It can take a long time to buy or sell and dealing costs are high:
- Unit size is large (single properties are indivisible)
- Uniqueness (each property is unique)
- Valuation (property valuation is a matter of professional judgement and there is no central market with quoted prices)
European vs. American option
- European option: can only be exercised at expiry
- American option: can be exercised at any date before its expiry
Definition of a warrant
Option issued by a company over its own shares. The holder has the right to purchase shares at a specified price at specified times in the future from the company
Collective investment schemes: open-ended vs closed-ended schemes
- Closed-ended scheme: (e.g. investment trust) number of shares of units available to the investors is fixed
- Open-ended scheme: (e.g. unit trust) managers can create or cancel units in the fund as new money is invested or disinvested
Investment trust
Investment trusts are a form of closed-ended fund. They have a capital structure exactly like other public companies, and can raise both loan and equity capital.
Main parties in an investment trust
- Board of directors (responsible for the direction of the company)
- Investment managers
- Shareholders
Unit trusts
Unit trusts are a for of open-ended funds. They are trusts in the legal sense and are thus not subject to company law
Main parties in a unit trust
- Management copmany (does all the work, sets up the tust, administers and invests the funds)
- Trustees (often an insurance company or a large bank. Role of trustees is to ensure that the managers obey the Trust Deed and to hold the assets in trust for the unit holders)
- Investors
Difference in marketability of closed-ended and open-ended funds
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
Difference in volatility of closed-ended and open-ended funds
- Gearing of closed-ended funds can make the shares more volatily than the underlying equity. Most open-ended funds cannot be geared
- Shares in closed-ended funds ar also more volatile than the underlying equity because the size of the discount can change
Main reasons for investing in foreign assets
- Matching liabilities in the foreign currency
- Increase the expected returns
- Reduce risk by increasing the level of diversification
Indirect overseas investments - options
- Investment in multinational companies based in the home market
- Easy to deal in familiar home market
- Earnings will be diluted by domestic earnings
- Investments in domestic companies with a substantial export trade
- Investment in collective vehicles specialising in overseas investment
- Investment in derivatives based on overseas assets
Factors to consider when investing in emerging markets
- Withholding taxes that apply
- Expertise in the market
- Extra costs (e.g. custody fees)
- Extent of additional diversity generated
