10 - The principles of investment Flashcards by Jay Ngo

What do pragramits use to asset allocation

Long run average rate of returns from relevant asset calasses

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What does theoretical approach to asset allocation

Masthematical analysis to obtain risk-return trade off given volatility. (uses historic volatility)
Correlation

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What type of judgement do pgramatists use

forward looking

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What is efficient frontier

A set of portfolios that have maximum rate of returns for every given level of risk

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What are some assumptions of optimisation models

Risk
Historic data
Forecasts
Cost
Implementation

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What is stochastic modelling?

Models the outcomes of random changes in variables, generates probabilistic assessment

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What is an example of stochastic modelling

Inflation
Interest rates

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When is strategic asset allocation for

Long term

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How can an advisor create a portfolio once a risk profile has been administered

In order of complexity

Historic data
Adjusted historic data
Stochastic

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What must an advisor do when creating a porfolio

Explain why chosen portfolio matches clients requirements

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What is top-down investment management?

Determine asset allocation within each world major investment region

Choose sector weightings

Select stock

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What is bottom up investment management

Managers select stocks based on own criteria

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What are the four fund management styles

Value
GAARP
Momentum
Contraianism

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What is value fund management style

Use analysis to identify under-valued businesses

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What type of funds typically adopt a ‘value’ management style?

Equity income; income & growth

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What is the ‘GAARP’ fund management style?

Find reasonably-priced areas with growth potential

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What type of funds typically adopt a ‘GAARP’ management style?

Active growth

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What is the ‘momentum’ fund management style?

Relies on tendency for both good + bad performance to persist

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What is an example of ‘momentum’ fund management?

Sector rotation: tendency of sectors to do well at different points in economic cycle

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What is the ‘contrarianism’ fund management style?

Buck trends to achieve high returns, taking advantage of the majority’s excessive optimism/pessimism

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Q
What type of funds typically adopt a ‘contrarian’ management style?

Hedge funds

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What is beta?

Market related return

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What is alpha

Specific return independent of market

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What is overlay strategy

Core portfolio is held and derivatives are used to alter currency

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What is a structured product?

Uses derivatives to limit capital risk in return for a lock-in period of up to 6 years

For a structured product, what is ‘hard protection’?

A given return is guaranteed

For a structured product, what is ‘soft protection’?

A Capital is at risk if a certain threshold is breached e.g. if the index drops 50%

Q What type of risk is involved with structured products?

Counterparty i.e. failure of the institution from which derivatives are bought

What are the charges of funds

AMC On going charge figure Performance fee Total cost of ownership

How many components should cost be separated into

What are the components of costs with investments

Ongoing charges for fund one off fees Incidental fees Transaction fees

What does the regulation of funds mean for investors if management group falls

Investors have no monetary loss - independent custodian holds asset

Q What detail does the FCA require if a fund advertises its past performance?

Discrete year-by-year performance

What is reputation based on

Performance Consistency on strategy

What criteria should be considered when choosing investment manager

Relevant experience Structure and style of investment Size, access to resources Quality of staff cost

Which are more volatile, open or closed-ended funds?

Closed, as they may be geared & the premium/discount to NAV can change

Which are better suited to illiquid asset classes, open or closed-ended funds?

Closed, as it may not be possible to sell illiquid assets in volumes required to meet redemptions in open-ended funds

What is one place to identify companies with strong ESG practices?

FTSE4Good Index Series

how are tracker funds structured?

Usually ETFs but can be investment trusts, unit trusts or OEICs

What are the two ways an ETF can track an index?

‘Physically’ (by holding stocks) or ‘synthetically’ (using derivatives)

What are the two aspects of passive fund selection

Index selection Structure

What are the two factors when choosing tax wrapper

Client individual tax and financial circumstances Underlying assets held in tax wrapper

What are the main tax wrappers to consider?

Collective investments (OEICs etc.) ISAs Personal pensions / SIPPS Life assurance bonds (UK/offshore)

Who benefits the most, relatively, from tax relief on pension contribitons?

Higher & additional rate taxpayer

What is the annual exempt amount for gains - investment

£6,000

What are collectives tax wrapper?

Tax efficient hold equity-based investments -Dividend tax Gains subject to CGT (When units or shares are sold)

What is an advantage of personal pension

PCLS aged 55 over - draw freely subject to marginal rate of income tax

When is tax free access of investment of life policies

after 7.5 years from inception (75% of 10 years for example)

What is maximum contribution of life policies

£3,600 a year

What does SIPP stand for?

Self-invested personal pension

What happens if a SIPP operator fails?

SCS covers the claim up to £85,000 per person, per firm

How can tax shelter benefits of UK investment bonds be maximised?

Arrange for investor to be a basic-rate taxpayer in the year of encashment

Can you gift investment bonds?

Yes - no Tax to trustees or other individuals

What is an advantage of offshore investment bonds?

They are not subject to UK tax so should grow faster

What are some features of platforms

Reduced paperwork Choice of funds Tax wrappers Allocation across wrappers Consolidated statements Portfolio reblanacing

Q Since 2014, why does the FCA require platform fees to be paid separately & directly?

To improve remuneration transparency and help consumers compare platforms

What is the exception to the FCA’s platform fee rule?

The product provider can pay a rebate to the platform provider IF it is passed on to the consumer in the form of additional units

What is one potential issue with third-party discretionary management services?

If the assets are held in the client’s name, the manager’s actions can trigger CGT liabilities

Where is objectives and principal factors of how portfolio be managed set out

Investment policy statement

If a trust deed has no specific investment powers, what governs the trustees?

Trustee Act 2000

What is a churn?

A switch of investments where the primary aim is to generate income for the adviser

What powers does Trustee Act 2000 give?

Invest as your own provided you have regard to standard suitability & diversification criteria

What are the categories of overall investment objective?

Capital growth Income Balance

What are some principles that affect investment strategies

Legal Nature of liabilities Cash flow Taxation

What does a strong positive cash flow into a portfolio mean for a manager?

They can take a long-term view & accept short-term uncertainty / losses

Where is means and frequrency of client reporting contained in

Terms of business letter given to clients Otherwise agreed in writing

Q How can an advisor decide if complex new products & services are appropriate investments?

3rd-party advice or external services

What is included in a contract note?

Bargain date & settlement date Who purchase was made for Number & price of shares Full name of share Charges including stamp duty/SDRT

How often are summary portfolio evaluations usually issued?

Quarterly

What does a summary portfolio evaluation include?

Value at date of last report Addition of cash/stock Reduction by each withdrawal Appreciation or depreciation New value & date

What are some justifications for switching investments

Change in objectives Client gives clear instructions market conditions overweigh initial investment Consistent underperformance of investment long term

How to reduce CGT on property, collective investment or shares

Transfer to partner - gain CGT exempt ammount - or lower tax Gain can be offset against other losses

10 - The principles of investment Flashcards

(73 cards)