Topic 8 - Collective Investement Schemes

Question 1

Main forms of collective investments

Answer 1

Unit trusts
Investment trusts
Investment bonds
OEICs

Question 2

Why are collective investments good for investors

Answer 2

Risk is spread
Investment manager does the work

Question 3

Diversification

Answer 3

Creating a portfolio of investments to spread risk so if one company isn’t doing well, other companies can offset

Question 4

How are investment funds categorised

Answer 4

Location - Uk
Industry - technology
Type of investment - shares, gilts

Question 5

What is a trust

Answer 5

An arrangement where a person gives an asset to another (trustee) to be looked after with a set of rules (trust deed)

Question 6

What is a unit trust

Answer 6

A trust divided into units, each representing a fraction of a trusts total assets

Accumulation unit - automatically reinvests any income generated, would suit investor looking for capital growth

Distribution/income units - split off any income received and distribute to unit holders

Question 7

How are units priced

Answer 7

Manager will calculate total value of trust assets divide the number of units that have been issued

Question 8

Bid-Offer spread

Answer 8

Difference between price the unit is offered to investor (offer price) and price fund manager will buy it back (bid price).

Between 3-5%

Question 9

Single pricing

Answer 9

Based on if there is more subscriptions or redemptions.

More Subscription = net inflow
More Redemption = net outflow

Question 10

How are units bought and sold

Answer 10

Through trust manager or intermediaries. Will receive 2 docs.

Contract note: specifies price, fund, paid

Unit certificate: proof of ownership

Question 11

How are unit trusts regulated and managed

Answer 11

Financial services and markets act 2000.

Authorised by FCA

Question 12

What are the charges applied for unit trusts

Answer 12

Initial charge - covers cost of purchasing fund assets

Annual management charge - fee paid for use of investment manager

Question 13

Taxation of unit trusts

Answer 13

CGT when making a gain

Question 14

Risks of investing in unit trusts

Answer 14

Wide range in choices meaning higher risk of failure e.g. overseas funds and emerging markets

Question 15

What is an investment trust

Answer 15

Public limited companies who invest in other companies

An investment trust is established under company law and listed on stock exchange as a PLC.

Question 16

Net asset value per share

Answer 16

Total value of the investment fund divided by number of shares issued

Question 17

Gearing

Answer 17

The level of debt of company’s equity as a percentage.

Also a way of recognising how much a company’s operations are funded by borrowing rather than shareholder capital.

Question 18

Taxation of investment trust

Answer 18

CGT on gain when they sell

Question 19

What is a split-capital investment trust

Answer 19

Investment trust offering 2 or more types of share, most common are:

Income shares: receive income generated by portfolio

Capital shares: share of capital growth remaining end of fixed term

Question 20

What is a REIT

Answer 20

Real estate investment trusts are a tax efficient way of investing in property. Investors get paid in dividends

Question 21

Open ended and closed ended

Answer 21

Unit trust is open ended (trust manager can create more units to meet demand)

Investment trust is closed ended (shares available are fixed)

Question 22

What is an OEIC

Answer 22

An open needed investment company is a limited company that uses investors funds to buy and sell the shares of other companies on their behalf.

No limit on how many shares you can but (open ended)

Question 23

Charges of an OEIC

Answer 23

Initial charge
Annual management charge
Dilution levy - added to unit price of large funds in or out of OEIC

Question 24

Risks of an OEIC

Answer 24

Similar to a unit trust
- Risk of investing in smaller company
- low risk because of professional investment manager and authorised by FCA

Question 25

Endowments

Answer 25

Type of investment based on life assurance. A lump sum is paid on death or maturity

Question 26

Investment bonds

Answer 26

Available from life assurance companies. You pay a lump sum

Question 27

Non mainstreamed pooled investments

Answer 27

Investment schemes that do not fulfil the FCA criteria for being regulated.

Question 28

Structured products

Answer 28

Offer protection on capital invested. Also have high returns as-well as high risk. Appeal to the cautious investor who wants to benefit in the growth possibilities

Question 29

SCARP and non SCARP

Answer 29

Structured capital at risk provides an agreed level of income/growth over investment period

Non-SCARP promises to provide minimum return of 100% capital invested as long as company is solvent (can pay off debts)

Question 30

Risks of structured products

Answer 30

• counterparty risk
• market risk
• inflation risk

Question 31

Wraps and platforms

Answer 31

Wraps are an internet based platform which holds all investors investments.
Usually offered by IFAs who charge a fee.

A fund supermarket does the same job but doesn’t have everything a wrap does.also charge a fee.

Both referred to as platforms