Unit Trusts, OEICs and Investment Trusts

Question 1

List 4 IA fixed income sectors

Answer 1

UK Gilts
UK Index Linked Gilts
Sterling Corporate Bond
Sterling Strategic Bond

Question 2

List 2 IA UK equity sectors

Answer 2

UK All Companies
UK Smaller Companies

Question 3

List 4 IA Overseas Equity Sectors

Answer 3

Europe Including UK
Europe Excluding UK
Global
Global Emerging Markets

Question 4

List 4 IA Mixed Asset Sectors

Answer 4

Mixed Investment 0-35% Shares
Mixed Investment 20-60% Shares
Mixed Investment 40-85% Shares
Flexible Investment

Question 5

List 4 IA Specialist Fund Sectors

Answer 5

Healthcare
Infrastructure
Commodities and Natural Resources
Specialist

Question 6

Diversification rules for UK UCITS funds (that are not index trackers vs that are tracker funds)

Answer 6

NOT tracker funds:
- Maximum 10% of total fund in shares of any one company in up to 4 companies
- Any other individual share must not exceed 5% of fund (minimum of 16 holdings)

ARE tracker funds:
- Maximum 20% of total fund in shares of any 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 7

OEIC/UT vs IT

Answer 7

OEIC/UT
- Borrow temporarily up to 10% of the value of fund
- Unlimited shares
- ACD

IT
- Borrow unlimited, permanent
- Fixed number of shares
- Board of directors

Question 8

Unit trust / OEIC taxation on investor

Answer 8

• To pay dividends and interest, unit trust must hold at least 60% in interest-paying investments e.g. gilts, cash, corporate bonds
• Dividends - taxable as normal
• Interest distributions - paid gross but subject to tax at normal rates (for trusts - 20% if within standard rate band then 45%)
• CGT as normal - equalisation payment must be deducted from acquisition price when calculating chargeable gain on disposal because it is effectively a refund

Question 9

What is dual pricing?

Answer 9

• FCA determines highest price units can be sold at and lowest price units can be re-purchased from investors
• Investors buy at higher offer price and sell back to managers at lower bid price
• Big offer spread= difference between prices and includes initial charge

Question 10

What is single pricing?

Answer 10

• Unit trust manager uses mid-market price
• Changes disclosed separately

Question 11

Unit Trust charges

Answer 11

Initial charge
AMC
Performance fees
Exit charges
Ongoing charges figure

Question 12

OEIC advantages

Answer 12

• Open ended structure widely recognised in Europe
• Regulations permit multiple share classes
• Structure allows umbrella funds offering fund choice
• Structure makes it easier to create new funds

Question 13

Unit trust and OEIC management services - multi-manager products - describe fund of funds

Answer 13

• Invests in funds managed by other managers
• Fettered fund of funds invests only in funds run by same management group
• Unfettered fund of funds selects from entire fund universe
• Switching between funds does not create a CGT liability

Question 13

Unit trust and OEIC management services - multi-manager products - describe Manager of Managers Funds

Answer 13

• External investment manager appointed for each asset class
• Overall manager decides asset allocation and appoints managers
• Monitors their activities

Question 14

Investment trust (closed ended) charges

Answer 14

• Usually lower than UT / OEIC
• AMC
• OCF
• Bid/offer spread
• Adviser charges
• SD/SDRT
• Dealing charges

Question 15

Describe warrants

Answer 15

• Right to buy at fixed price at pre-determined date or within specified period
• Produce no income therefore no income tax
• Taxed under CGT rules
• Can be bought/sold on stock exchange
• Exercising warrants dilutes NAV of existing shares