Chapter 11: Other investment classes

Question 1

Difference between open-ended and close-ended CIS’s

Answer 1

OE has high marketability compared to CE
CE can borrow capital just like normal companies, it is limited in OE
The shares price can be lower than NAV in CE
CE haswide range of assets they can invest in
Tax can be different between the two
CE has opportunity to provide more returns because of added volatility
True level of NAV can be uncertain in CE

Question 2

Advantages of Collective Investment Schemes over direct investment

Answer 2

• They are useful for obtaining specialist expertise
• An easy way to obtain diversification
• Some of the costs of direct investment management can be avoided
• Holdings are divisible
• There may be tax advantages
• Can be used to track a specific index (for index tracker funds)
• There may be marketability advantages, but they may be less marketable than the underlying asset

Question 3

Disadvantages of Collective Investment Schemes over direct investment

Answer 3

• Loss of control – Investor has no control over the individual investments chosen by the manager
• Management charges are incurred
• There may be tax disadvantages such as withholding tax which cannot be reclaimed

Question 4

Problems of overseas markets

Answer 4

• A different market performance to the home market and the associated mismatching risk.
• Currency fluctuation risk – The currency invested in falling or the home currency rising
• Increased expertise needed to assess the market
• Additional administration functions: dividend tracking and collection, custodian (someone who takes care of the investment).
• Different tax treatment – investors may liable to further tax
• Different accounting practices
• Less information may be available than in the home market
• Risk of adverse political developments
• Language problems – Using a different language to publish accounts
• Time delays
• Poorer market regulation in some countries
• Restrictions on the ownership of certain shares
• Liquidity – less developed are not very liquid

Question 5

Factors to consider before investing in emerging markets

Answer 5

• Current market valuation
• Possibility of high economic growth rate
• Level of marketability
• Currency stability and strength
• Degree of political stability
• Market regulation
• Restrictions on foreign investment
• Range of companies available
• Communication problems
• Availability and quality of information

Question 6

Problems with investing overseas

Answer 6

Mtv
● Mismatching - Different market performance to home Mismatching local liabilities
● Increased expertise needed to assess market
● Taxed differently
● Additional Volatility due to exchange rates
● Accounting standards different
Additional practical problems – CATERPILLAR TV
● Custodian of overseas assets needed
● Adverse currency movements and add admin required
● Time delays (time zone differences)
● Expenses and Expertise
● Regulation poor
● Political problems
● Information harder to obtain
● Language difficulty
● Liquidity problems
● Accounting differences
● Restrictions on ownership of assets