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Cemap > topic 8 - collective investment schemes > Flashcards

topic 8 - collective investment schemes Flashcards

1
Q

Forms of collective investment vehicles

A
  • Unit trusts
  • Investment trusts
  • Investment bonds
  • OEICs
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2
Q

advantages of collective investments

A
  • Expert management - Services of a skilled investment manager are obtained at a cost that is shared among the investors
  • Diversification - Risk can be reduced by diversification of investments
  • Reduced dealing costs - Fund managers handling investments of millions of £ can negotiate reduced dealing costs
  • Fund choice - Wide choice of investment funds
  • Enable investors to gain exposure to assets they would not otherwise be able to access
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3
Q

Actively managed funds

A

use the services of a fund manager to make decisions on asset selection and when holding are bought and sold

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4
Q

Passively managed or tracker funds

A

seek to replicate the performance of a particular stock market index

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5
Q

unit trusts

A
  • Pooled investment - A pooled investment created under trust deed.
  • Contributions - Can invest a lump sum in the unit trust, make regular contributions, or a mixture of both
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6
Q

equity trust

A

where the underlying assets are mainly shares – pays dividends

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7
Q

fixed-interest trust

A

where investment is mainly in interest-yielding assets – pays interest

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8
Q

units

A

unit trusts are divided into units, each unit representing a fraction of the trust’s total assets.

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9
Q

accumulation units

A

automatically reinvest any income generated by the underlying assets. Suit someone looking for capital growth

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10
Q

distribution or income units

A

splits off any income received and distribute it to unit holders. Units may increase in value in line with the value of underlying assets

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11
Q

Creation price

A

the price at which the unit trust manager creates units

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12
Q

Offer price

A

the price at which investors buy units from the managers

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13
Q

Bid price

A

price at which the managers will buy back units from investors who wish to cash in all or part of their unit holding

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14
Q

Cancellation price

A

minimum permitted bid price, considering full costs of buying and selling

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15
Q

Bid-offer spread

A

the difference between the price at which a unit is offered to an investor (offer price) and the price at which the fund manager will buy it back (bid price)

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16
Q

how unit trusts are bought and sold

A
  • Unit trust managers are obliged to buy back units

o The contact note – specifies the fund, no. of units, unit price and amount paid. Importance for CGT purposes
o The unit certificate – specifies the fund and no. of units held. Also, proof of ownership

17
Q

how unit trusts are regulated

A
  • In the UK, primarily regulated under the terms of the Financial Services and Markets Act 2000 and must be authorised by the FCA

o Must be suitably diversified
o Cannot borrow an amount more than 10% of the fund’s net asset value

18
Q

If more than 60% of the underlying investments within a unit trust are cash or fixed-interest securities (UK gilts or corporate bonds)

A

o Will be classed as a fixed-interest or non-equity fund
o Interest payments
o Income is classed as savings income, paid gross, without deduction of tax.
o Only taxpayer who have used their PSA are taxed on the excess income

19
Q

If less than 60% of the underlying investments are cash or fixed-interest securities

A

o Classed as an equity fund
o Dividends
o Tax treatment is the same as for shares
o Where dividend income is in excess of the DA, then it is taxed at different rates depending on the tax band

20
Q

What are investment trusts?

A
  • Public limited companies whose business is investing in the stocks and shares of other companies.
  • An investment trust is established under company law and operates as a listed plc
  • Listed company - Must meet FCA requirements to gain a stock market listing, and is governed by rules in its memorandum and articles of association
  • Closed-ended - no. of shares available remains constant
21
Q

Net asset value per share (NAV)

A

total value of the investment fund’s assets less its liabilities, divided by the no. of shares issued.

22
Q

Gearing

A
  • The level of debt as a % of a company equity. Way of measuring the extend to which a company’s operations are funded by borrowing rather than by shareholder capital.
  • The ability to gear up is the reason why investment trusts are viewed as being riskier than a similar unit trust or OEIC
23
Q

How investment trusts are taxed

A
  • At 85% of income received by the fund manager of investment trusts must be distributed as dividends to shareholders
  • Taxation is the same as for equity trusts
  • Fund managers are exempt from corporation tax on capital gains
24
Q

A split-capital investment trust

A
  • fixed-term investment trusts offering 2 or more different types of share
  • income shares – receive the whole of the income generated by the portfolio but no capital growth
  • capital shares – receive no income. When the trust is wound up at the end of the fixed term, share all the capital growth remining after fixed capital requirements have been met
25
Q

Real estate investment trusts (REITs)

A
  • tax efficient property investment vehicles allowing private investors to invest in property
  • stamp duty reserve tax is charged at 0.5% on purchase, much cheaper than if purchasing a property
  • REITs pay no corporation tax on income or growth for the property rental portion of their income
26
Q

qualifying features of REITs

A
  • At least 75% of their gross income derived from property rent
  • At least 90% of their profits distributed to their shareholders
  • Dividends can be paid in cash or as stock dividends
  • No individual shareholder can hold more than 10% of the shares
27
Q

What is an OEIC?

A
  • Open-ended investment company
  • Pooled investment - Limited liability company that pools the funds of its investors to buy and sell the shares of other companies and deal in their investments
  • To invest in an OEIC, investors buy shares in the company
  • No limit to the no. of shares issued
  • Means the fund can expand or contract according to demand
28
Q

How are OEICs regulated and managed?

A
  • Must be authorised by the FCA
  • A depositary overseas the operation of the company
  • An authorised corporate director manages the OEIC

A dilution levy – may be added to unit price on purchase of shares or deducted from the price on sale

29
Q

Endowments

A
  • Investment based on life assurance
  • Combine life assurance and regular savings
  • Lump sum paid if the life assured dies during term or if they survive to the end of term, it is paid at maturity
30
Q

with-profits endowments

A

low risk as they offer the guarantee of at least a minimum value at maturity

31
Q

unit-linked endowments

A

do not guarantee this and the value depends on how underlying investments perform

32
Q

Friendly society plans

A
  • Able to market a tax-exempt savings plan, effectively an endowment with tax benefits
  • Has a maximum annual savings limit of £270
33
Q

Investment Bonds

A
  • Collective investment vehicles based on unitised funds
  • Single-premium whole-of-life assurance policy - Available from life assurance companies
  • Individuals invest a single (lump sum) premium to the life company.
  • Fund income reinvested – no dividends
  • Can give a guaranteed level of income
  • In the event of death, the policy ceases and a slightly enhanced value (usually 101% of bid value) is paid out
34
Q

Regulation of cryptoassets

A
  • The FSMA 2000, which came into effect in Oct 2023, brought qualifying cryptoassets within the FCA’s remit for financial promotions
  • Qualifying cryptoasset – any digital representation of value or contractual rights that is cryptographically secured, transferable and fungible.
  • Firms wishing to promote cryptoassets in the UK to retail customers must be authorised or registered by the FCA
  • Firms must implement a 24-hour cooling off period for first time investors
35
Q

What potential benefit does gearing offer to an investment trust that is not available to a unit trust or OEIC?

A

An investment trust can borrow in order to take advantage of investment opportunities. Unit trusts and OEICs cannot do this

36
Q

How are shares in an open ended investment company priced?

A

There is one price, based on the value of the assets divided by the number of shares.

37
Q

Investment bonds are attractive to investors because withdrawals are tax free. True or false?

A

False. The investor may withdraw up to 5 per cent of the value of the original investment per annum without paying tax at the time of withdrawal but a tax liability may arise when the bond matures, on encashment of the bond or on death of the bondholder.

Cemap (26 decks)

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