Outline nine factors that Yana would take into consideration when conducting the
annual review meeting with Akari.
- Any change in needs/objectives/requirements/circumstances/State of health/
dependents/marital status. - Any changes in assets & liabilities/income & expenditure/emergency fund
- Any capital gains made/unused gains/use of CGT/ISA allowance.
- Any changes in legislation/Budget/products.
- Review of investment performance against goals/target/benchmark.
- Rebalance of portfolio.
- On-going suitability.
- Any change in ESG/ethical considerations.
- Re-establish AtR/CfL.
- Level of service/advice proposition/adviser charges.
- Market/economic outlook/sentiment.
Calculate, showing all your workings, the money-weighted rate of return (MWR) for
the global managed fund.
£700 + £38,200 - £25,000 - £10,000 = £3,900
£25,000 + (£10,000 x 7/12) = £30,833.33
(£3,900 / £30,833.33) x 100 = 12.648648 = 12.65%
State the Income Tax treatment of the two types of income payment that can be
made by a real estate investment trust (REIT) for Akari if held within his GIA.
Exempt/PID/Ring-fenced
* Paid net of 20%/BRT.
* Subject to further 20%/marginal rate tax.
* PSA not available/non-savings income.
Dividend
* Paid gross.
* Taxed at 32.5%.
* Dividend allowance/£2,000 available.
Outline the tax benefits to Akari if he were to hold a REIT within his stocks and
shares ISA compared to within his GIA.
- ISA manager;
- can reclaim 20%.
- Income/PID/dividend/not subject to Income Tax.
- Gains is tax free/not subject to CGT.
List four types of fund structure with which a retail client could gain access to the
commercial property sector. Exclude open-ended investment companies (OEICs)
and REITs from your answer.
- Unit trust.
- Investment trust.
- PAIF.
- UCITS/SICAV.
- Exchange traded fund.
- Life/pension funds.
Identify four main types of investment risk that would be relevant to open-ended
direct commercial property funds and describe briefly each of these main types
of risk.
- Accessibility
- Unable to withdraw funds/dealing gated/suspended.
- Liquidity/pricing
- Fund unable to sell assets at fair price/bid price/dilution levy/hard to sell.
- Valuation
- Material uncertainty/unable to provide NAV.
- Void
- Loss of tenant/property empty.
- Income
- Loss of yield/unable to collect rent/reduction in rental income.
- Economic
- Assets cyclical/sensitive to business cycle.
State the main stages of the top-down investment process of a global managed
fund.
- Asset class allocation.
- Geographical allocation.
- Sector weightings.
- Individual stock/security selection.
Explain briefly the momentum investment style.
- Trend/price movement;
- likely to continue/further gains to come.
- Sell before trend ends/reverses.
- Ignores fundamental/intrinsic value.
- Shorter term.
Explain briefly the growth at a reasonable price (GAARP) investment style.
- Pay premium/higher price for;
- stock with specific advantages/qualities.
- Mix/combination of value and growth.
- Longer term.
Identify the three main forms of the efficient market hypothesis (EMH).
- Weak.
- Semi-strong.
- Strong.
State whether an active or a passive investment strategy would be most effective
for an equity-based investor if EMH is deemed to be correct and explain the
reasons why.
- Passive.
- Stockpicking does not work.
- Not possible to outperform market/generate alpha.
- Market is efficient/market prices in all information.
- Technical analysis does not work.
- Transaction costs offset outperformance/outweigh benefit
State the two types of bonus for a with-profits policy and describe briefly each
type, including when they can be applied.
- Annual/reversionary
- Regular;
- variable.
- Once applied cannot be removed.
- Terminal/Final
- One-off;
- paid on maturity;
- death;
- surrender/redemption.
- Not guaranteed.
Explain briefly the main differences between conventional and variable unitised
with-profits funds.
- UWP has units/CWP does not.
- UWP bonus in advance/CWP bonus in arrears.
- UWP bonus can be changed/CWP cannot.
- UWP bonus applied to unit price;
- daily/over course of year.
- CWP bonus added to sum assured.
- UWP easier to switch fund.
- UWP easier to calculate current value/more transparent.
State the two main types of money market fund and identify the key differences in the
maturity and life of their respective assets.
- Short-term
- Up to 60 days maturity.
- Up to 120 days life.
- Standard
- Up to 6 months maturity.
- Up to 12 months life.
State five investment-related factors that Damba would take into consideration
when assessing a sustainable withdrawal rate.
STATE CII
- Initial yield/natural income.
- Expected return/growth rate.
- Taxation.
- Asset allocation.
- Charges.
- Inflation/interest rate outlook.
- Sequencing/volatility risk.
- Time horizon.
Identify four client-related factors that would be relevant when considering an
investment strategy.
- Age/state of health.
- Marital status/any dependants.
- Any other assets/liabilities.
- Any emergency fund.
- ESG/ethical preferences.
- AtR/CfL.
Describe briefly four changes that Damba may consider when constructing a
portfolio designed for an outlook of a sustained rise in inflation, compared with
Trevor’s current asset allocation.
- Reduce/hold less cash.
- Diversify into real asset classes.
- Hold inflation-linked bonds.
- Own equities with rising/sustainable dividends.
- Set aside initial income requirement in cash/take profits/use gains to support
income.
Identify five benefits of using collective funds, compared to holding direct
equities, for Trevor’s investment portfolio. Assume that the funds would be held
within the ISA and exclude taxation from your answer
- Access different asset classes.
- Reduction in systematic risk.
- Minimisation of non-systematic risk.
- Access to different sectors/styles/niche.
- Professional management.
- FSCS/investor protection.
- Less admin/involvement.
Explain the diversification rules for a retail Undertakings for the Collective Investment
of Transferable Securities (UCITS) OEIC, based upon the minimum number of
permissible holdings and the relevant percentages.
- Minimum 16 holdings.
- Maximum/up to 10%;
- in four companies;
- Maximum/up to 5%;
- in twelve/rest/others.
Calculate, showing all your workings, the beta for the multi-factor fund.
Beta = 4.7 - 0.2 /(5 -0.2)
Beta = (4.5 / 4.8)
Beta = 0.9375/0.94
Alternative:
4.7 = 0.2 + Beta (5 - 0.2)
4.7 = 0.2 + Beta (4.8)
4.5 = Beta x 4.8
(4.5 / 4.8) = Beta
0.9375/0.94 = Beta
State the two common principles that apply across multi-factor models.
- Investors require extra return;
- for extra risk.
- Focus on risks that cannot be eliminated by diversification.
Explain briefly the limitations of beta as a measure of risk.
- Measure of market risk alone/ignores other factors/risks.
- Assumes risk-free rate is correct/suitable.
- Not stable or accurate predictor of future beta.
Explain briefly the main investment-related factors that Damba would take into
consideration when deciding whether to choose active or passive strategies for the
collective funds.
Active
* Fund objective/mandate/strategy.
* Manager experience/reputation.
* Alpha/IR/Sharpe/performance/track record.
Passive
* Replication strategy/Tracking error.
* Is market efficient?
* Counterparty risk.
Either
* Diversification/asset allocation.
* Costs/charges.
* Choice/use of benchmark.
Explain briefly the concept of dilution in respect of the exercising of warrants.
- Company issues new shares.
- Existing shareholders;
- own less of company/shares worth less;
- unless buy additional/new shares.
