Random Flashcards
Strategic Asset Allocation
- Decide what proportion of of portfolio in broad asset classes taking into account
Risk
Market conditions
Diversification
Liquidity
Investment time horizon
-Then follow top down
Works based on EMH and is for long term investing.
Tactical asset allocation
Also known as market timing.
Allows investment manager to move range of each asset classes depending on market
E.g
Cash 10-20%
Bonds 10-40%
Equities 45-75%
Total 100%
Bull or Bear market
Bull - Investors/market as a whole are positive
Bear “ “ “ negative
E.g.
Fixed income - if investment manager bullish… take longer duration bonds
Equities - bull increase exposure to higher beta stock
Derivatives-
Bull - buy call options or go long
Bear - buy puts or go short
Business cycle names and characteristics
Recovery/acceleration - sluggish output, weak profits, interest rates and inflation falling
Boom - fast growth, inflation rises & interest rates increase to dampen demand
Slowdown - growth slows, inflation high, central banks reluctant to cut rates. Sales drop & unemployment rises
Recession - output sluggish, weak profits. Inflation & interest rates falling.
Recession is 2 quarters of negative inflation.
Depression sometimes happens when trough low and high level of business failure
Types of inflation (3 main types)
3 main types
Demand pull - companies charge more because they can as people have more spare money.
Cost pull - low supply of goods, companies charge more as they have less to sell but still need to make a profit.
Built in - caused by expectation. Employees see prices rise,
they ask for pay rises
Companies have to put prices up
Types of risk
Capital/credit risk - (default, downgrade, credit spread, counter party & Bail-in)
Liquidity risk
Event risk
Interest rate risk
Inflation risk
Currency risk
Shortfall risk
Systemic/non-systemic risk
Market risk
Political risk
Regulatory risk
Concentration
Manager
Bond duration and how it moves with changes in interest rate
Bonds have an inverse relationship with interest rates. The duration measures how sensitive the bond is.
If a bond has a duration of 5 and interest rates go up by 1% the bond would go down by 5%.
Top down investment order
Asset allocation
Sector selection
Stock selection
Stochastic Modelling (Monte Carlo Simulation)
Asset allocation based economic model.
Predicts probable outcomes for different investments.
Major cause of 07/08 financial crisis as practitioners used overly optimistic assumptions
Should be reviewed quarterly
Friendly Society contributions & tax treatment
£300 if paid monthly (or more frequently that annually e.g quarterly)
Annual max £270 pa
Tax
Interest dividends and capital gains tax free in the fund and investment growth tax free
EIS, VCT & SEIS
[IT relief]. EIS. VCT. SEIS
Max inv £2,m* £200k £200k
relief 30% 30% 50%
Holding 3y 5y 3y
1yr bck? Y. N Y
Tax div? Y. N. Y
CGT gains 3y. Y. 3y. CGT def Y N (50%)
Business PR. 2yr N. 2yr
*Knowledge intense
Benefits of GIA over bond
Wider range of investments
No underlying tax
Gains CGT (lower rate)
Uses CGT annual exemption
CGT rebalances on death
Bed & ISA available
Simple
Value investing
- Bottom up
- FUNDAMENTAL ANALYSIS to identify undervalued stock
- Contrarian view - considers out of favour
- Places emphasis on dividends and high div cover
- Focus on low P/E or PEG
- Assumes market not efficient
- Assumes prices will correct over time
Long term approach
Growth investing
- Bottom up
-Tries to identify stock with potential for above average growth - Ignores valuation/fund analysis
- High P/E or PEG
- lower reliance on dividends & div cover
What is Regression Analysis
Regression analysis is a set of statistical methods used for the estimation of relationships between a dependent variable and one or more independent variables
It plots a straight line through a scatter chart
Can predict impact of economic changes or establish beta in multi factor
Features of NS & I income bond
Paid gross monthly
Taxes as savings income (PSA)
Investment, min £500 - max £1,000,000
Can invest jointly (max is per person)
Instant access (penalty free)
Can’t accumulate
Interest variable
Green savings bond
Locked in for 3 years
Interest rolled up and paid in final year
Fixed rate
Lower interest than income bond
Invest between £100 - £100,000
Difference between Managed Portfolio Service (MPS) & Fund of Funds (FoF)
FoF 1 fund & MPS collection
FoF trades within fund, MPS as investor
FoF no CGT on trades
FoF investor can control CGT on encashment & MPS CGT on each trade
3 main types of benchmark
Constraint - Used to limit the construction of the portfolio
Target - Used to match/exceed performance
Comparator - compare performance/risk
Difference between AIM admission & UK main market
Aim no min capitalisation, main £30 m
AIM no min earnings, main 3yrs revenue record
AIM no min free float - main 10%
AIM no admission docs - main market prospectus
AIM nominated advisor- main, listing sponsor
GARRP
Lower P/E /PEG ratio than growth
Pays only fair price
A mix of value & growth investing
REIT
UK resident
Close ended
Property rental ring fenced at least 75% of total profit and total value of assets
Interest on borrowing covered 125% by rent
Distribute 90% of exempt profits within 12m
Property income distribution (PID)
Paid net 20% tax
PSA not available
Dividend paid gross
Things that can change a companies share price other than the market
Economic outlook
Political/tax/regulation changes
Investor sentiment
Supply & demand
Credit rating
Takeover activity
Profit/earning expectations
Capital event
Dividend expectations
Change of management
Competitors
Fraud
Inclusion or removal from index
Types of preference share and characteristic
Cumulative - Has right to unpaid dividends (arrears) carried over
Participating - Additional dividend linked to company profit
Redeemable - Repayable by the company
Convertible - Convertible to ordinary shares on pre-set terms
Diversification rules (UCITS) OEIC
16 Holdings minimum
Maximum 10% in up to 4 companies
Other companies max 5%
Maximum unlisted 10%
Inverted Yield Curve Reason
Expectations that;
- long term interest rates will fall
- but short term interest rates will rise
- Economic outlook poor, possible recession
- Costs more for long term bonds than short term
Flat Yield Curve Reason
Market Uncertainty
Economic Slowdown Expectations
Central Bank Policy (actively raising interest)
Strong Demand for Long-Term Bonds
Low Inflation Expectations
Normal Yield Curve
Long term rates are higher due bonds that have a longer term are more exposed to the uncertainty that interest rates or inflation could rise at some point in the future
Ways to track a benchmark
Full replication - buy stock that fully replicates the benchmark (higher cost in trading)
Stratified Sampling - Buy sample of the index’s constituents
Optimisation - Uses a computer model/algorithm to produce sample of stock
Synthetic - Uses derivatives
Benefits of Gilt fund over direct held
Active management
Diversification
Mixture of duration’s and maturities across yield curve
Can invest in new gilts at issue
Access to market participants
Drawbacks of gilt based fund over direct
Exposure to duration risk
Loss of known redemption date
Investor protection limited to £85,000
Subject to CGT
Daily dealing
Fund charges
Types of Money Market Funds
Short-Term Money Market Fund
Invested in short term debt & money market instruments.
- Weighted average maturity of no more than 60 days
- Weighted average life of no more than 120 days.
Standard Money Market Fund
Looking for slightly higher return therefore looks to invest in assets with
- Up to 6 month maturity
- Between 6-12 months.
Types of bonus on With-Profits Policy
Annual/Reversionary
- Regular payment
- Variable amount
- Once applied can’t be removed
Terminal/Final
- One-Off
- Paid at Maturity or death or Surrender/Redemption
- NOT GUARANTEED
Difference between Conventional and Variable unitised with-profits funds
UWP - has units
UWP bonus in advance, CWP bonus in arrears
UWP bonus can be change, CWP can’t
UWP bonus applied to unit price
CWP bonus applied to sum assured
UWP easier to switch
UWP easier to calculate current value as its more transparent
Info required when applying for additional permitted subscription
Ni Number
DOB proof (birth certificate)
Death certificate
Marriage certificate
Full name & address
IFISA
Crowd funded debentures
Cash
Peer to peer
Sharia/alternative finance
Three main ways stock market index are weighted
Market capitalisation
Price
Equal/unweighted
FSCS per investment type & when amount changed
Investments
£85,000 per firm.
No protection on individual shares
Pension
100% no upper limit
SIPP
£85,000
Compulsory insurance
100% no upper limit
Non Compulsory insurance
90% no upper limit
Before 1st April 2019 - £50,000
Ways to mitigate sequencing risk
Reduce level of initial withdrawal
Secure income through annuity
Take natural income/dividends
Increase cash holdings
Invest in fixed interest
Reduce risk/increase diversification
Retire later
Change frequency of withdrawals
Main features to consider when looking at DIM
Charges
Overlap with existing non-DIM assets
Regulatory permissions/Reputation/Financial Strength
Past performance
Investment style/strategy
ATR
Conflict of interest
Basis of agreement
Main features of MPS
Collective based
Low min investment
CIP/investment committee
Changes can result in CGT
Range of portfolios based on risk
Not bespoke
Low cost
Behavioural Finance common
Over confidence - Believe own research best
Misunderstanding of probability- Too focused on yield at expense of potential risk to capital
Anchoring - fixated on a trait, headline 9% return
Loss aversion - people generally react more to loss than the same percentage gain
Regret - hold onto an asset feeling it will come back
Herding - Fear of missing out, follows the crowd. Greater fool theory
Endowment effect - Greater value as already owned, emotional attachment & fear of selling
Options available at the end of a Index-linked Savings Certificates
- renew your Certificate for another term of the same length
- renew it for a term of a different length (only 3-year and 5-year terms available)
- cash it in
Not open to additional investment, no new money
How to calculate the maturity value on Index-linked Savings Certificates
Original value + Interest + Inflation (CPI)
Main functions of ACD in OEIC
- Compliance and regulatory reporting
- Responsible for pricing/valuations
- Appoints & oversees manager
- Buys & sells shares
- Maintains shareholder register
- Maintains liquidity/imposes Dilution levy
- Prepares accounts
Main functions of Depository in OEIC
- Acts as custodian
- Safeguards assets
- Collects/pays income distributions
- Monitors ACD on investments & borrowing limits
- Deals with any wind up fund
Difference between FoF & Manager of Managers
Feature (FoF) (MoM)
Style. Invst ex funds. Hires ex man
Control Less More
Fees. Higher (dbl layers) typ lower
Transparency Lower Higher
Users Retail & hedge Institu&pens
PAIF Qualification Criteria
Be an OEIC – A UK tax-resident Open-Ended Investment Company, not a close company.
Have a Property Focus – At least 60% of net income must come from property investment.
Meet Distribution Rules – Must distribute 100% of tax-exempt property income, separating:
- Property income
- Interest income
- Other taxable income
Not a close company; at least 60% of investors must be qualifying investors (e.g., pension funds).
Be Tax Transparent – Exempt from corporation tax on property income; tax applies at the investor level.
Volatility Managed Fund definition
A Volatility Managed Fund is an investment fund designed to control and reduce fluctuations in value by actively managing risk. These funds aim to smooth returns by adjusting asset allocation based on market conditions, often using strategies such as:
Diversification – Investing across asset classes (equities, bonds, alternatives) to spread risk.
Dynamic Asset Allocation – Adjusting the mix of assets in response to market volatility.
Risk Targeting – Keeping overall portfolio risk within a defined range, often measured by standard deviation or value-at-risk (VaR).
Use of Derivatives – Some funds use options, futures, or other derivatives to hedge against market swings.
Difference between interim and final dividend
Interim Dividend:
Paid mid-year, before financial year-end.
Approved by the board of directors.
Based on estimated profits.
Can be revoked before payment.
Generally smaller in amount.
Final Dividend:
Paid after the financial year ends.
Requires shareholder approval at AGM.
Based on audited financial statements.
Cannot be revoked once declared.
Typically larger in amount.
Contango & Backwardation & roll yield
Contango: Futures price is higher than the expected future spot price, often due to storage or carrying costs.
Backwardation: Futures price is lower than the expected future spot price, usually due to high demand or shortages.
Roll yield is the return from rolling futures contracts as they near expiration. It’s positive in backwardation (futures price below spot, gaining value) and negative in contango (futures price above spot, losing value). Common in commodities and futures-based investing.
