Collectives

Question 1

Structure of investment trust (10 marks)

Answer 1

• run as a company under company law
• closed ended
• gearing is allowed
• can borrow on a permanent basis
• share price is driven by supply and demand
• shares traded related to the NAV
• could be a premium or discount to the NAV
• usually at a discount as gearing brings additional risk
• live pricing
• can invest anywhere in the world
• can invest in listed or unlisted shares
• can issue options to attract investors on day 1 and protect them from drop in value
• different types of shares can be issued

Question 2

How can gearing in an investment trust enhance returns (3)

Answer 2

• investment trust can borrow money
• and then invest the borrowings
• to get a return above the cost of the borrowings

Question 3

Reasons for a premium (of an investment trust) to NAV to narrow (4)

Answer 3

• reduced demand/ increased supply
• sector out of favour
• fund manager out of favour
• poor performance

Question 4

Reasons why performance of an investment trust and unit trust that are invested in a similar way may differ (4)

Answer 4

• gearing
• changes in premium/discount
• different holdings
• charging structure

Question 5

5 differences between the structure of IT and UT

Answer 5

• IT is closed ended / UT open
• IT is public listed company / UT is a trust
• Shares / units
• listed on stock exchange / not listed
• company directors / trustees
• appointed investment managers/ in house manager
• UT are single priced / IT are dual priced
• gearing not allowed in UT/ is allowed in IT

Question 6

What are ‘UCIS’ funds

Answer 6

Unregulated collective investment schemes

• any scheme which is not regulated by the FCA
• they are perfectly legal
• but their marketing must be carried out subject to certain rules and often only to certain types of investors
• it can not be marketed to retail investors in the UK

Because they are unregulated:

• may be greater risk of loss to client
• and so are classed as high risk investments
• may not be covered by FSCS
• marketing is restricted to sophisticated and high net worth individuals

Question 7

What is a UCITS fund?

Answer 7

• Undertakings for Collective Investments in Transferable Securities
• once authorised in it’s host country it can be marketed anywhere in EU
• subject to marketing rules within the other country being met
• in UK that means a UCITS fund from France must register with the FCA
• then wait two months before marketing
• under FCA rules

Question 8

Main differences between UCITS and UCIS which lead to UCIS being higher risk (8)

Answer 8

• UCITS is authorised by EU
• for retail distribution
• UCIS not for retail distribution
• UCITS have better liquidity
• UCITS regulated by FCA / UCIS is not
• better investor protection for UCITS
• UCITS has better transparency
• UCITS are more diversified
• UCITS has more favourable borrowing restrictions

Question 9

Who can UCIS be promoted to (5)

Answer 9

• existing holders
• certified HNW individuals
• Enterprise and charitable investors
• eligible employees of the fund
• institutional clients
• certified sophisticated investors
• self certified sophisticated investors

Question 10

Safeguarding regulations that govern UCITS in respect of diversification (6)

Answer 10

• not more than 10% of fund in any one company
• no more than four companies at the maximum (4x10%)
• remainder must have maximum of 5% of fund value
• minimum of 16 holdings
• maximum 10% in unquoted shares

Question 11

Safeguarding regulations that govern UCITS in respect of borrowing (4)

Answer 11

• borrowing only permitted
• up to 10% of fund value
• in a temporary basis
• if supported by expected receipts