Unit Trusts, OEICs & Investment Trusts Flashcards
Diversification rules for UK UCITS Funds
Maximum 10% of total fund in shares of any one company
Only four separate shareholdings to the maximum of 10%
Fund must have minimum of 16 holdings
Borrowing of UCITS funds
Retail UK 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 UK UCITS can borrow up to 10% on a permanent basis
Unit trust manager
Responsible for day-to-day running of unit trust
Manages trust in line with regulations, trust deed and scheme particulars
Responsible for promotion, advertising,selecting investments and fund administration
Must be authorised to conduct investment business
Must have adequate financial resources
Must supply information to trustee when asked
Must maintain record of units
Trustees of Unit Trust
Legal owner of assets
Must be regulated by the FCA
Required to be formally independent from management group
Key role is to ensure investors are protected
Hold/control assets check manager’s actions and investments
Responsible for register of unitholders (can delegate this duty)
Distribution of income to unitholders
Reporting for unit trusts?
Must publish annual and half yearly accounts
Taxation treatment of a Unit Trust Fund
Annual management expenses are offset
No tax on capital gains
No tax on income/gains from options or futures
Interest and rental income subject to corporation tax at special 20% rate
UK dividends - no tax liability
Foreign dividends may have had withholding tax deducted at source (may not be reclaimable)
Interest paying funds pay an interest distribution which is deductible for corporation tax i.e.,
there is no double taxation
Open Ended Investment Companies (OEICS)
Main type of open-ended fund in the UK
Also called investment companies with variable capital (ICVCs)
Legal structure is a company
Diversified pooled investment
Valued on net asset value (NAV) basis
Investor’s interests represented by shares
ACD responsible for in OEICS
Compliance with investor protection
regulations
Register of shareholders
Day-to-day management
Preparation of accounts
Management of investments
Depositary in OEIC responsible for
Oversees management/investor protection
e.g., valuation, pricing and dealing
Ensuring ACD correctly exercises investment and borrowing powers
Safekeeping of assets
Reporting funds
Dividends and interest treated the same as other UK based funds
Capital gains on disposal
Subject to normal CGT rules
A reporting fund does not have to distribute all its income but must report it to HMRC
Non-Reporting funds
Usually roll-up funds
Gain on disposal (including death of investor) subject to CGT principles
Taxed in year of encashment
But no CGT annual exempt amount
How investment trust works
Issues fixed number of shares (closed ended)
Regulated by company law
Shares traded on London Stock Exchange
Able to ‘gear’
External management groups normally undertake day-to-day investment management
Share price depends on supply and demand
Offer price - higher price investors pay to purchase shares
Bid price - lower price investors sell at
Market makers spread is difference between bid and offer price
Hurdle rates
Indicates annual growth needed from investments in order to repay each share class at wind-up (negative hurdle rate indicates surplus assets)
Asset cover
Way of measuring company’s ability to cover liability to share classes at pre-determined
redemption price from current assets
Warrants
Right to buy at fixed price at pre-determined date or within specified period
Produce no income therefore no income tax liability
Taxed under CGT rules
Can be bought and sold on stock exchange prior to exercise date
Usually issued as sweeteners with new trust share issues
Exercising warrants dilutes NAV of existing shares
