Unit Trusts, OEICs and Investment Trusts

Question 1

Different ways of holding assets:

Answer 1

• Open-ended - units/shares created according to demand
• Unit Trust - assets held by trustees & invested by managers
• OEIC - assets held by independent depositary

Question 2

Approved Securities and Eligible Markets

Answer 2

• Managers may invest in approved securities without further enquiry
• At least 90% of a securities fund must be in approved securities
• Market must be:
o Liquid
o Regulated
o Operating regularly o Recognised
o Open to the public

Question 3

Diversification rules and 2 exceptions

Answer 3

Max 10% in any one company
Max 4 companies up to the max 10%
Any other shares max 5%
Minimum 16 holdings

• UCITs funds that are tracker funds can hold up to 20% of the value of the fund in the shares of one company (and exceptionally up to 35%)
• Funds investing more than 35% in gilts must invest in at least 6 different stocks (no single stock can be more than 30% of the value of the fund).

Question 4

Borrowing

Answer 4

• Retail UCITs schemes not permitted to borrow on permanent basis (unlike investment trusts)
• Can borrow up to 10% of the value of the fund on a temporary basis
• Non-retail UCITs can borrow up to 10% on a permanent basis

Question 5

Authorisation of funds

Answer 5

• FCA authorised collectives can be marketed freely in the UK
• Unregulated schemes are known as ‘UCIS’
• They cannot be marketed to UK retail investors
• But can be marketed to professional investors
• They are considered higher risk
• May not be covered by the FSCS.

CAN’T market UCIS, HNW and sophisticated only.

Question 6

Unit trust setup

Answer 6

• Legally binding trust deed
• Managers & trustee primary objective is to protect investors
Has manager and trustees.

Question 7

Taxation Treatment of a Unit Trust Fund

Answer 7

• Annual management expenses are offset
• No tax on capital gains
• No tax on income/gains from options or futures
• Equity funds pay corporation tax on overseas income, rent and interest
• UK dividends - no tax liability
• Interest paying funds pay an interest distribution which is deductible for corporation tax ie there
is no UK corporation tax liability

Question 8

Equalisation payments

Answer 8

Unit trust and OEICs will have fixed dates on which income is distributed. A new investor who invests between distribution dates (but before the ex-dividend date) will receive the full distribution for the period even though they were only invested for part of the period

The investor is only assessable to income tax on the part of the payment which reflects their period of ownership. The balance is treated as a return of their original capital and is known as an ‘equalisation payment’. This amount is not taxable.

Question 9

Unit trust and OEIC investor tax treatment (same)

Answer 9

CGT payable on gain upon sale
Interest taxable (PSA allowable)
Dividends taxable

Question 10

Impact of Income on Unit Prices

Answer 10

• As income comes into fund and accounting date approaches the unit price rises
• When accounting date passes the price is marked ‘xd’ (ex-distribution)
• The price of income units usually falls by amount of income
• The xd period must be no more than 4 months after the end of each annual or interim accounting
period
• If unitholder sells during an xd period they still get the allocation of income

Question 11

Share Exchange

Answer 11

• Allows investors to exchange existing shareholdings for equivalent value in fund’s units
• May be cheaper and simpler way of disposing of small shareholding
• Disposal for CGT purposes

Question 12

Box Management

Answer 12

• Stock control mechanism
• Managers hold units in box for buy/sell transactions

Forward Pricing = Price calculated at next valuation point
Historic Pricing = Price calculated at last valuation point

Question 13

Open-Ended Investment Companies (OEICs) characteristics - its a company

Answer 13

• Valued on net asset value (NAV) basis
• Investor’s interests represented by shares
Regulatory Structure
• Authorised by FCA to be marketed in UK
• Authorised Corporate Director (ACD)
• Assets held by independent depositary
• ACD & depositary = authorised persons
• Sales and marketing regulated by FCA
Product Structure
• Self-contained company
• Holds annual general meeting
• Can be stand-alone fund or an ‘umbrella’ company with sub-funds
• Issues shares not units
• Single pricing usually used
• Borrowing is temporary for a UCITS retail fund and no more than 10% of the fund

Question 14

OEIC ACD and depository

Answer 14

ACD responsible for:

• Compliance with investor protection regulations
• Register of shareholders
• Day-to-day management
• Preparation of accounts
• Management of investments

Depositary responsible for:
• Oversees management/investor protection eg valuation, pricing and dealing
• Ensuring ACD correctly exercises investment and borrowing powers
• Safekeeping of assets

Question 15

European Savings Directive

Answer 15

• Mandatory directive
• Automatic exchange of information between member states
• On income payments made to EU residents
• Designed to counter cross-border tax evasion on savings income