16. Investment products Flashcards
(70 cards)
1
Q
Why does direct investment form a small proportion of lending?
A
Because of the mismatch between borrower’s needs for the longer term (illiquid and poss higher-risk funding), and preference of savers for shorter term (liquid & lower-risk assets).
2
Q
2 cons of direct investment?
A
- Higher transaction costs
- Asymmetric information - better info about risk & return for borrower so greater costs on savers
3
Q
3 basic types of financial intermediary?
A
- Banks
- Savings institutions e.g. pension & life funds
- Investment intermediaries e.g. unit trusts & hedge funds
4
Q
3 types of transformation between savers & borrowers brought about by intermediaries?
A
- Size - small into larger size investments
- Maturity - pool ST liquid savings to make LT investments
- Risk - portfolio diversification
5
Q
Name 3 advantages of collective investment vehicles.
A
- lower costs from pooling inv’s
- expertise of professional inv managers
- greater diversification
- can achieve specialisation
- can gain exposure to foreign inv’s
6
Q
Name 2 disadvantages of collective investment vehicles.
A
- individual cannot choose individual inv’s
- fund manager performance varies widely
7
Q
4 main types of collective inv vehicle?
A
- OEICs
- UTs
- ITs
- Life assurance-based schemes
8
Q
UTs & OEICs are ___ whereas ITs are ___.
A
- open ended
- closed-ended
9
Q
3 types of regulated investment scheme?
A
- OEIC
- An authorised UT
- A recognised scheme permitted to operate in UK
10
Q
What cannot be marketed to retail investors?
A
Unregulated schemes
11
Q
Authorised schemes can be separated into 3?
A
- an Undertaking for Collective Investment in Transferable Securities (UCITS) scheme
- a qualified investor scheme (QIS) - only for professional investors
- non-UCITS retail scheme (NURS)
12
Q
3 institutions involved in activities of UT?
A
- unit trust manager
- trustee
- investment manager
13
Q
What does a UT manager do? [3]
A
- definies terms of trust
- markets trust
- requests trustees create & redeem units
- recv payments from investors
- appoints trustee
14
Q
Who owns & holds the underlying investments of a UT?
A
Trustee, usually a corp e.g. bank or insurance co.
15
Q
What is dual pricing?
A
Where consumers can purchase units at a (higher) offer price and redeem them at a (lower) bid price.
16
Q
Both ___ and ___ of UT have to apply jointly to FCA for authorisation.
A
- UT manager
- trustee
17
Q
UT authorisation is discretionary, time limit for FCA decision for:
- NURS & QIS funds
- UK UCITS funds
A
- within 6m
- within 2m
18
Q
If FCA refuses UT authorisation, time limit for applicant to refer case to Upper Tribunal (Tax & Chancery Chamber)?
A
28 days
19
Q
Name 2 conditions a UT must fulfil to be authorised.
Manager & trustee must:
A
- be independent of each other
- each be a co. incorporated in UK or other state within EU
- each have place of biz in UK
- each be an authorised person
20
Q
Who is responsible for regulation of authorised UTs?
A
FCA
21
Q
How are OEICs similar to:
- UTs
- ITs
[2 each]
A
- both open-ended i.e. no. of units varies day to day
- their price will directly reflect value of fund’s portfolio
- both have a company structure
- assets of fund looked after by a depository not trustee
22
Q
UK UCITS rule:
Up to XX% of scheme inv’s may consist of transferable securities or approved money-mkt instruments issued by one issuer.
This fig increased to XX% in respect of up to XX% of value of fund (i.e. up to XX holdings of XX% each)
A
- 5%
- 10%
- 40%
- 4 holdings of 10% each
23
Q
UK UCITS rule:
No limit on amount invested in govt & public securities, provided no more than XX% of scheme’s assets are invested in issues of one body.
Can break this rule if no more than XX% of scheme is invested in single issue, scheme’s assets comprise at least XX diff govt & public securities issues, and rel disclosures made.
A
- 35%
- 30%
- 6
24
Q
UK UCITS rule:
Scheme may only borrow up to XX of fund NAV.
A
10%
25
UK UCITS rule:
Up to XX% of value of inv's of scheme may be in other collective inv schemes.
No more than XX% of total inv's can be in any one scheme.
- 100%
- 20%
26
ETFs?
Funds that are traded on the stock exchange and whose assets mirror the price movements of the underlying index, sector or commodity.
27
Name 3 advantages of ETFs.
1. Diversification.
2. Traded like shares, so can be sold short & bought on margin.
3. Trade throughout the day at mkt prices rather than once a day at closing mkt prices. Therefore greater liquidity than with UTs.
4. Low-cost, usually passively managed.
5. Greater transparency than UTs.
28
Name 2 disadvantages of ETFs.
1. Investors may lack understanding of new asset classes.
2. Leveraged investments are not well understood.
3. Investors need to understand diff costs e.g. bid-offer spreads, commissions, NAV discounts.
29
ETFs and their owners taking on responsibilities associated with being a shareholder is known as what?
Stewardship.
30
Buying & selling shares in an ETF is same as a normal share transaction, but creating or redeeming a share can only be done by who?
Authorised participants (APs).
31
How do Authorised participants (APs) (mkt makers) create new shares in ETFs?
By transacting with the ETF manager / sponsor (similar to individual investor interacting with UT manager).
32
Each day the ETF manager publishes a list of securities it wants to own in the fund.
What is this list called and what is it the basis for determining>?
- Creation basket
- the NAV of the ETF.
33
AP buys shares in same proportion as creation list, or uses some from own inventory, delivers basket of securities to ETF manager in exchange for equal value of shares in ETF, then sells shares in open mkt to investors.
These transactions occur in large blocks known as what?
Creation units, often in blocks of 50,000 shares.
34
What is the opposite of a creation unit?
Redemption basket.
35
How do synthetic ETFs work?
No purchase of underlying assets, but rather commitment of typically an investment bank to meet the returns on a chosen index through the use of derivatives contracts with a 3rd party.
36
Name 2 pros of synthetic ETFs.
1. Cost advantages over conventional ETFs
2. Popular for tracking less liquid benchmarks
37
What are 2 criticisms of synthetic ETFs?
1. That they could be a source of systematic risk at times of mkt stress.
2. Little transparency.
38
Exchange traded commodities (ETCs)?
Exchange traded notes (ETNs) that track either individual commodoties or broader-based commodity indices.
39
IT companies are ___ companies with ___ listed on the ___.
- limited liability
- ordinary shares
- LSE.
40
Unlike pension funds, ITC funds are ___ and are able to ___.
- closed ended
- raise more capital e.g. through rights issue or borrowing
41
ITCs are limited to a XX% investment in any 1 one company
15%
42
Ongoing charges figure (OCF) includes AMC and other charges for administrative services, but excludes? [2]
- performance fees
- trading costs
43
Total cost must now be given, as per?
MIFID II
Mkts in Financial Instruments Directive
44
Clients must be notified of charges how often, and in what form?
- At least once a year
- In £s as well as %s)
45
Mifid II introduced idea of total cost of investing (TCI), which involves 3 main categories of charges?
1. ongoing charges of fund & service costs
2. transaction costs e.g. buy & sell costs
3. one-off charges e.g. initial or exit fees, performance fees
46
Four main services for private client funds?
1. Execution-only service
2. Advisory dealing service
3. Portfolio advisory service
4. Portfolio discretionary service
47
Execution-only service?
No advice or recommendations - just a way to buy or sell assets for commission.
48
Advisory dealing service?
Executing biz on behalf of client, but also can involve advice about proposed transaction, e.g. share prospects.
49
Portfolio advisory service?
Trying to identify client's overall financial position & needs, then giving advice about construction of portfolio of assets + appropriate investment strategy.
50
Portfolio discretionary service?
Stockbroker can buy or sell on client's behalf if certain prices hit.
51
Name 2 advantages of a portfolio discretionary service.
- Simplifies paperwork
- and speeds up execution of transactions
52
Structured product?
An investment with a well-defined objective in terms of risk & return, usually defined by reference to a specific underlying asset, e.g. FTSE 100, and a specific calendar time period.
53
3 main types of structured product?
1. Structured deposits
2. Structured capital protected products
3. Structured capital-at-risk products
54
Structured deposits?
Fixed-term deposit accounts with 'interest' being determined by performance of an underlying asset, often based on an investment index, with at least initial investment guaranteed at maturity.
55
2 parties involved in creation of structured products?
1. Plan manager - product creation, S&M
2. Deposit-taker or counterparty - supplies underlying investment
56
Structured capital protected products?
Like structured deposits but without guarantee of insured deposit if counterparty / provider defaults.
57
Structured capital-at-risk products?
Full original investment capital sum is at risk if certain levels of underlying asset(s) are breached at certain points or over certain periods of time.
58
To reduce the chance of investor suffering loss on structured products, what do some products offer?
Collateralisation held by a separate custodian, often in form of govt securities.
59
Creators of structured products market them for around a ____ known as an "___" prior to a "___".
- one to two month "offer period"
- prior to a "strike date"
60
Structured product investment life = "inv term", can be around XX years, ends at "___".
- 6 yrs
- "final index date"
61
How long after final index date might clients recv their money at "maturity date"?
Around 2 weeks
62
Structured products subject to ___ unless held in a tax-exempt structure e.g. ISA
CGT
63
Capital element of structured product typically guaranteed by investing in?
And remainder invested in?
- zero-coupon bonds
- call option on underlying index (+ mgt chg's)
64
Name 2 pros of platforms.
- simplify
- and consolidate investment process by bringing together investment reporting & administration of their investments
- can send regular portfolio valuations & tax statements
65
Since Apr 2016, what 3 platform pricing elements have to be split out?
- adviser
- fund
- platform chg's
66
General insurance biz involves ___ contracts and is backed by more ___ assets.
___ insurance biz, ("life assurance") is a mix of ___ & ___.
- ST
- liquid
- LT
- Life assurance
- LT savings
67
What is longevity risk re pensions?
Possibility of retiree under a DC pension running out of money.
68
3 main motivations for maintaining portfolio liquidity?
To be prepared to:
1. meet client redemption requests
2. meet potential collateral or margin call needs for derivative or fwd-selling positions
3. take advantage of potential mkt opportunities
69
What can be used to manage risk and maximise risk-adjusted return possibilities.
Derivatives.
70
What is 'gating'?
'Gate' functions typically to slow down pace of redemptions from investment with aim of reducing impact on value, liquidity & concentration of fund's portfolio.
