2.5 CIS

Question 1

what are some of the objectives of a CIS?

Answer 1

income, capital growth, combination

Question 2

What are the pros and cons of CIS?

Answer 2

Pros:
- time
- expertise
- benefit from economies of scale
- diversification is easy with pooled assets

cons:
costs: initial charge + ongoing fund management costs + exit charge (for less liquid assets) + performance fees

• risk returns are not guaranteed
• lack of control

Question 3

what are regulated vs unregulated CIS?

Answer 3

regulated:

• recognised: overseas funds (eg. UCITS - EU directives)
• authorised: Domestic funds - UK rules

unregulated: UCIS eg. hedge funds

Question 4

what is a trustee

Answer 4

person who makes sure manager acts in interests of investors

Question 5

What 3 restrictions do regulated CIS typically have?

Answer 5

• concentration: must be diversified
• controlling interests: max exposure to single company
• borrowing: cannot be highly geared

Question 6

What happens when restriction on investment powers fall?

Answer 6

restrictions on marketing increases

Question 7

Who can each type of fund market to?

Answer 7

UCITS: in the EEA

Domestic funds: Domestic only

Unregulated: professional clients and domestic only

Question 8

What main barnches can CIS be divided into?

Answer 8

Unit trusts

OEIC: open-ended investment companies (aka. ICVC)

Question 9

What is the difference between distribution and accumulation units?

Answer 9

Distribution: pays out income

Accumulation: reinvests income

Question 10

What are the differences between unit trusts and OEICs?

Answer 10

Holdings: units vs shares

Legal structure; trust vs company

supervision: trustee vs depositary

managed by: fund manager vs authorised corporate director

price system: bid offer (dual) vs single price (+additional admin fee)

Question 11

What is a dilution levy?

Answer 11

Additional admin fee for single priced funds

Question 12

What are investment trusts?

Answer 12

• Company
• Closed ended
• issues shares
• supervised by independent auditors
• managed by fund managers
• have flexible investment rules
• can borrow
• bid-offer price system
• value dictated by market sentiment (traded on secondary market - LSE)

Question 13

What are open ended funds?

Answer 13

• trades performed directly w management
• no secondary market (units/shares not transferrable)
• portfolio is valued once every business day ( the valuation point)
• price based on NAV per unit/share (not influenced by market as there is no market; fund manager makes sure demand = supply)

pricing can be single or two way

costs:

• initial charges
• ongoing management charges
• exit charges (typically for limited time)

Question 14

What are closed-ended funds?

Answer 14

Investment trusts:

• company NOT a trust
• shares trade on secondary market
• both ordinary and pref. shares
• closed ended (fixed capital structure) fixed number of shares - supply cant change based on demand
• can use gearing
• prices dictated by demand for shares (not supply)
• an trade at premium or discount to NAV

Closed-ended vehicles can:

• Invest in unquoted private companies as well as quoted companies
• Provide venture capital to new companies or companies requiring new funds for expansion
• Borrow money to help them achieve their objectives

Question 15

what is a split capital inv. trust?

Answer 15

• companies set up for a limited period (eg. 5 yrs) with aim to liquidate by end of that period and provide investors w cash
• shares come out in 3 main classes:

zero div. pref shares
- no income + redemption val

income shares
- income + redemption val

capital shares
- no income + whatever is left in portfolio
- highest risk, highest potential return

Question 16

What are venture capital trusts?

Answer 16

closed-ended vehicles which invest in relatively new/start-up
companies.

VCTs are structured like investment trusts and traded on the
London Stock Exchange.

Question 17

What is an ETF

Answer 17

• incorporated as an ICVC but tradable on secondary markets (hybrid fund):

open ended
- trades at NAV

HOWEVER:
trade on secondary markets
- real time pricing (mitigates transparency issue with open-ended funds)

typically tracker or index funds (eg. FTSE 100)

Question 18

What do short shares do?

Answer 18

Provide inverse performance to index

Question 19

What do leveraged shares do?

Answer 19

Provide accelerated performance compared to index

Question 20

Who can participate in primary ETF market ?

Answer 20

Only authorised participants

Question 21

How are shares usually bought/sold from manager of an ETF?

Answer 21

• In kind (with baskets of the underlying securities)

so wapping baskets of shares for units

Question 22

What are ETCs?

Answer 22

Exchange traded commodities

• commodity (not equity) based
• can link shares to commodity indexes
• benefit is easier exposure to commodity investment

Question 23

What is a structured product?

Answer 23

Combination of 2 or more individual financial instruments (typically a bond and a deriv) to create a v specific risk reward profile

• created to get risk reward profiles that dont exist w other traditional products:

eg.

• low risk capital growth
• high risk, higher income levels

Question 24

What can structured products be tailored to provide?

Answer 24

• growth w low risk or high income
• run for a defined term eg. 18 month to 7 yrs (early redemption penalty)
• defined risk and return

Question 25

What are the 2 main types of structured product?

Answer 25

- structured deposit (returns on deposit linked to performance of another asset ) - you will still get principal back because its a deposit - guaranteed by FSCS - structured investment - may not get capital protection - no FSCS protection

Question 26

What are the 3 main types of structured investment?

Answer 26

- capital protected product: discount on ZCB funds purchase of option, option can be linked to any asset - capital at risk product: leveraged position but sacrifices capital protection - buffer zone product

Question 27

What is an example of a capital protected product?

Answer 27

zero coupon bond combined w a long option position

Question 28

What is capital at risk product also known as?

Answer 28

accelerated tracker

Question 29

What are the features of a buffer zone product?

Answer 29

- offers participation in returns on asset - negative returns protected up to a predetermined level (eg. 20%) - full exposure to loss if predetermined level is breached

Question 30

What are the pros and cons of structured products?

Answer 30

pros: flexible risk return - principle protected - risk enhanced reduced volatility often based offshore (in tax neutral societies) cons: - credit risk on bond - counterparty risk on deriv - provider risk on product itself - inflation risk - often needs to be held till maturity - charges can be high - call risk (auto calls are in place preventing opportunity to rebound from loss/further capitalise on gain)

Question 31

What is direct property investment and its pros/cons?

Answer 31

Investment in property itself pros: diversification of assets and relatively low volatility a real asset - inflation protection cons: - illiquid - high transaction costs - possible depreciating values

Question 32

what is indirect property investment?

Answer 32

Through funds

Question 33

What are 2 types of property funds?

Answer 33

- Real estate investment trusts - Property Open ended funds

Question 34

What are features of REITs?

Answer 34

- removes liquidity risk of holding direct property - REITs do not pay corp tac in UK if distributing 90% of income (to shareholders) cons: - volatility; buying shares not the actual property

Question 35

What are features of property open ended funds?

Answer 35

-NAV pricing more directly reflects price of underlying property in portfolio Cons: - many funds resort to redemption moratoria

Question 36

What is redemption moratoria?

Answer 36

infrequent redemptions (because underlying asset is very illiquid)