Topic 8 Flashcards
What are the 4 main collective investment vehicles and products
Unit trusts
Investment trusts
Investment bonds
OEICs (open ended Investment companies)
What is the advantage of collective investments for individual investors
The services of a skilled investment manager are obtained at a cost that is shared among the investors
Investment risk can be reduced because the investment manager spreads the fund by investing in a large number of different companies
Fund managers handling investments millions of pounds can negotiate reduced dealing costs for their investors
There is a wide choice of investment funds catering for all investment strategies preferences and risk profiles
Collective investment schemes enable investors to gain exposure to assets they would not otherwise be able to access due to minimum lot/investment size e.g. Corporate bonds
How are investment funds categorised
Location
Industry
Type of investment
Other forms of specialisation
Many investment funds are based on more than one categorisation, list 3 possible categorisations
Funds that aim to produce a high level of income
Those that aim for capital growth at the expense of income
Those that seek a balance between growth and income
What are the two categories of funds according to their management style
Actively managed funds
Passively managed or tracker funds
What are unit trusts?
A unit trust is a pool investment created under trust deed an investor will generally consider a unit trust as a means of trying to produce a better return than could have been achieved elsewhere they can invest lump some in the unit trust make regular contributions or a mixture of both
How can a unit trust be categorised
Equity trust - This is where underlying assets are mainly shares and equity trust pays a dividend
Fixed income trust - This is where Investment is mainly in interest yielding assets. Fixed income trusts pay intrest
Unit trusts may offer what two units
Accumulation units - Automatically reinvest any income generated by the underlying assets this would suit someone looking for capital growth
Distribution or income units - Split off any income received and distribute it to the unit holders
How are units priced
The fund manager will calculate the total value of trust assets allowing for an appropriate level of costs and then divide this number by the number of units that have been issued. on a daily basis managers calculate the price at which units may be bought and sold using a method specified in the trust deed
What are the 4 important prices in relation to unit trust transactions
Creation price - This is the price at which the trustee/depositary creates units on behalf of the unit trust manager
Offer price - Yet the price at which investors buy units from the managers
Bid price - This is the price at which managers will buy back units from investors who wish to cash in all or part of their unit holding
Cancellation price - The minimum permitted bid price taken into account the full costs of buying and selling at times when they are both buyers and sellers of units the bid price is generally above this minimum level since costs are reduced because underlying assets do not need to be traded
How are units bought and sold
Sold - Unit trust managers are obliged to buy back units when investors wish to sell them
Bought- Units can be bought direct from the managers or through intermediaries they can be they can be purchased in writing by telephone or online
What 2 important documents may purchases receive from unit trust managers
The contract note - this specifies The fund, the number of units, the unit price and the amount paid it is important because it gives a purchase price which will be needed for capital gains tax purposes when the units are sold
The unit certificate - This specifies the fund and a number of units held and is the proof of ownership of the units
How are unit trusts regulated
Unit trusts are primarily regulated under the terms of the financial services and markets act 2000
They must be authorised by the financial conduct authority if marketed to retail investors
What rules do the fca require for a unit trust
The unit trust is suitably diversified
The fund cannot borrow an amount of more than 10% of the funds net asset value and even then only for a temporary period
What does a trust deed do
The trusted places obligations on both the manager and the trustees
The manager aims to generate profit for the unit trust provider from the annual management charge and dealing in units
The trustee’s overall role is to ensure investors are protected and that the manager is complying with the terms of the trust deed
What are the managers responsibilities in managing a unit trust
Managing the trust fund in line with the trust deed
Valuing the assets of the fund
Fixing the price of units
Offering units for sale
Buying back units from unit holders
What are the trustees responsibilities in a unit trust
Setting out the trusts Investment directives
Holding and controlling the trusts assets
Ensuring that adequate investor protection procedures are in place
Approving proposed advertisements and marketing material
Collecting and distributing income from the trusts assets
Issuing unit certificates (if used) to Investors
Supervising the maintenance of the register of unit holders
The trustees usually also acts as a depositary in which case they would also be subject to regulatory obligations applicable to depositaries
What 2 types of charges are applied to unit trusts
Initial charge - Covers the costs of purchasing fund assets the initial charges is typically covered by the bid offer spread
Annual management charge - This is the fee paid for the use of the professional investment manager the charge varies but is typically between 0.5% and 1.5% of the fund value
How are unit trusts taxed
If more than 60% of the underlying investments within a unit trust are cash or fixed interest securities such as uk guilts or corporate bonds the fund will be classed as a fixed income or non equity fund and any income distributions will be treated as interest payments
If less than 60% of the underlying investments are cash or fixed interest securities the fund will be classed as an equity fund and all income distributions will be treated as dividends
What are investment trusts
Investment trusts are collective investments but unlike unit trusts they are not unititised funds, In fact despite their name they are not even trusts
They are public limited come limited companies whose business is investing in the stocks and shares of other companies as a company an investment trust is established under company law and operates as a listed plc its shares are listed on the stock exchange
A unit trust and an open ended investment company must be fca authorised by contrast an investment trust must meet fca requirements to gain a stock market listing and it is governed by rules in its memorandum and articles of association
As with all companies shares are sold to investors the number of shares available remains constant the company does not create more just because investors want them so an investment trust is said to be closed ended
How can you invest in an investment trust
A stock broker
A financial adviser
Direct from the investment trust manager
