Topic 8 Flashcards
1
Q
What are the four main collective investment vehicles/ products?
A
- Unit Trusts
- Investment trusts
- Investment bonds
- OEIC’s (open ended investment companies)
2
Q
What are four key advantages of collective investments?
A
- Investment manager expertise
- Diversification
- Reduced dealing costs
- Wide choice of funds
3
Q
Outline key points of a ‘unit trust’
A
- Pooled investment under a trust deed
- Trust deed places obligations on both the manager and trustees
- Can be categorised as a ‘equity fund’ or ‘fixed income fund’
Equity fund - If less than 60% of the underlying investments are cash or fixed-interest securities = Equity fund
Fixed income fund - If more than 60% of the underlying investments are cash or fixed-interest securities = Fixed income fund - It is open ended
- Total value of trust assets divided by number of units = unit price
- Unit trust managers obliged to buy back units when investors want to sell
- Units can be bought direct from the managers or through intermediaries
- Purchasers may receive two important documents
1. The contract note - Specifies the fund, number of units, unit price and the amount paid.
2. The unit certificate - Specifies the fund and the number of units held and is proof of ownership of the units - If purchased through an intermediary, holding may be confirmed on a non-certificated basis, instead investors will receive a regular statement outlining the number of units held and their value from the intermediary.
- Authorised by FCA
- Fund must be suitably diversified
- Fund cannot borrow an amount of more than 10% of the funds net asset value and even then only for a temporary period.
- Two types of charges are applied to a unit trust:
1. Initial charge
2. Annual management charge
4
Q
What are ‘managers’ and ‘trustees’ responsibilities in a unit trust?
A
Managers:
— 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
Trustees:
— Setting out the trust’s investment directives
— Holding and controlling the trust’s assets
— Ensuring that adequate investor protection procedures are in place
— Approving proposed advertisements and marketing material
— Collecting and distributing income from the trust’s assets
— Issuing unit certificates (if used) to investors
— Supervising the maintenance of the register of unit holders
5
Q
What are the four important prices in relation to unit trust transactions?
A
- Creation price - The price at which the trustee/depositary creats units on behalf of the unit trust manager
- Offer price - The price at which you can buy units
- Bid price - The price at which managers will buy back units from investors who wish to sell
- Cancellation price - the minimum permitted bid price, taking into
account the full costs of buying and selling. At times when there 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.
6
Q
Briefly outline key points of an ‘investment trust’
A
- Despite name they are not trusts
- They are Public limited companies
- Mainly invest in stocks and shares of other companies
- Operates under company law and operates as plc
- It’s shares are listed on the stock exchange
- Must meet FCA requirements to gain a stock market listing
- Is classed as ‘close ended’
- Can buy shares via a stockbroker, financial adviser or direct from the investment trust manager
- Annual management charge is typically between 0.5% - 1.5%
- Where share price is less than NAV the trust is said to be trading at a discount
- Where share price is more than NAV the trust is said to be trading at a premium
- As they are constituted as a company, they can borrow money this is known as ‘gearing’
- If they have a high level of borrowing in comparison to assets they hold this is described as being ‘highly geared’ or ‘highly leveraged’
- At least 85% of the income received by fund managers must be distributed to shareholders as dividends
- Fund managers are exempt from capital gains
- Investors are liable for capital gains if they exceed CGT allowance when selling their shares.
7
Q
What is a split-capital investment trust?
A
- These are fixed term investment trusts
- Offer two or more different types of share. The two most common ones are
1. Income shares - These receive the whole of the income generated by the portfolio but no capital growth
2. Capital shares - These receive no income, but when the trust is wound up at the end of the fixed term, share all the growth remaining after fixed capital requirements have been met.
8
Q
What is a real estate investment trust (REIT)?
A
- Tax efficient property investment vehicle
- Allows private investors to invest in property while avoiding disadvantages of direct property investment
- Stamp duty reserve tax is 0.5%
- Pay no corporation tax on income or growth for the property rental portion of their income, subject to meeting requirements.
9
Q
What are the requirements for a REIT to qualify for no corporation tax on the rental portion of their income?
A
- At least 75% of gross income must be from property rent
- The remainder can come from other areas however corporation tax is due on this portion
- At least 90% of profits must be distributed to shareholders net of basic rate tax
- Dividends can be paid in cash or as stock dividends.
- No individual share holder can hold more than 10% of the shares
- Single property REIT’s are only allowed in special cases
- They can be held in ISA’s, junior ISA’s, child trust funds, and SIPP’s
10
Q
Briefly outline an open ended investment company (OEIC)
A
- A Limited liability company
- Pools funds from investors to buy/sell shares of other companies and deal in other investments
- To invest you buy shares in the company
- It is open ended
- Value of shares vary according to market value of the company’s underlying investments
- Can be structured as an ‘umbrella’ company that is made up of several sub funds
- Different types of share can be made available within each sub-fund
- Can only borrow money for short term purposes
- Must be authorised by the FCA
- A ‘depositary’ oversees the operation of the company and ensures it complies with investor protection requirements
- The ‘depositary’ is authorised by the FCA
- An authorised corporate director manages the investments, buys/sells shares as required, ensures share price reflects underlying NAV of investments
- Tax depends on whether it is fixed income or equity based OEIC
- Fund managers not subject to CGT
- Investors may be liable for CGT
11
Q
What are the six types of OEIC’s?
A
-Income
- Capital growth
- Fixed income
- Access to overseas markets
- Access to specialist markets
- Index tracking
12
Q
What are the charges in relation to an OEIC?
A
- Initial or buying charge - Is added to unit price and is normally 3%-5% of the value of the individuals investment
- Annual management charges - based on the value of the fund typically 0.5% for index funds and 1.5% for managed funds
- Dilution levy - May be added to unit price on purchase of shares or deducted on sale of shares in situations where there are large flows of funds in/out of the OEIC
13
Q
Briefly explain a ‘friendly society plan’
A
- Offers tax-exempt savings plans
- Maximum of £270 a year can be saved
- Initially set up as 10 year plans
- Often marketed to parents and grand parents to save on behalf of their children and grandchildren
14
Q
Briefly explain ‘investment bonds’
A
- Based on unitised funds
- Available from life assurance companies
- Set up as a single-premium, whole of life assurance policies
- Individuals who invest do so by paying a single lump sum premium
- If it is unit linked, the investor will recieve a policy document showing that the premium has purchased a certain number of units in the chosen fund and that those units have been allocated to the policy
- Surrender value = value of all the units allocated, based on the bid price on the day when it is surrendered
- Normally can swap from one fund to another
- They are taxed internally at 20%
- Investment bonds are ‘non-qualifying’
15
Q
What is the criteria for a ‘qualifying’ life assurance policy?
A
- Premiums must be payable monthly up to annually and be set up for at least 10 years
- If premiums cease within 10 years or 3/4 of original terms if this was less than 10 years, the policy becomes non qualifying
- Sum payable on death must be at least equal to 75% of total premiums payable
- Premiums in any one year must not exceed twice the premiums in any other year or 1/8 of total premiums payable
16
Q
What is top slicing?
A
17
Q
What is a ‘non-mainstream pooled investment’ (NMPI’s)?
A
- Collective investment scheme that do not fulfil FCA regulations so can not be sold to the general public in the UK
- The FCA handbook defines a NMPI as
- A unit in an unregulated collective investment scheme (UCIS)
- A unit in a qualified investor scheme
- A security issues by a special vehicle, unless an excluded security
- A traded life policy
- Rights or interest in any of the investments listed above
- Carry a high risk
- Are typically only suitable for high-net-worth individuals
- FCA does not permit the marketing of NMPI’s
18
Q
What is a ‘structured capital at risk products (SCARPs)?
A
- Defined as a product that provides an agreed level of income or growth over an agreed investment period
- They must display the following characteristics
a) The customer is exposed to a range of outcomes in respect of the return of initial capital invested
b) The return of initial capital invested at the end of the investment period is linked by a pre‑set formula to the performance of an index, a combination of indices, a ‘basket’ of selected stocks (typically from an index or indices), or other factor or combination of factors.
c) If the performance in b) is within specified limits, repayment of initial
capital invested occurs. If it is not, the customer could lose some or all of the initial capital invested.
