6 - Characteristics, risks, behaviours and tax considerations of investment products. Part 1 - Indirect investments - unit trusts, OEICs and investment trust companies Flashcards
Why are Collective investment schemes popular with investors?
They offer a good way to invest small sumds of money as investments are pooled into a larger fund
Professional fund managers make the underlying decisions
An investor can achieve a balanced portfolio as the fund managers invest in a spread
They offer the ability to persue particular objectives that an investor might otherwise avoid
Risk is reduced by the wide spread of the underlying portfolio
What are the characteristics of OEICs and unit trusts?
The allow an investor to participate in large portfolios or shares with many others
Units or shares are sold to investors, each is a small but equal fraction of a portfolio
Unit trusts are held for investors by trustees and invested by managers, OEICs are held by an indepedant depository
There is generally an initial charge and an annual management fee, or alternatively an exit charge may apply
What are the IA sector definitions? (Investment association)
Captial protection Income Growth Specialist fund Those principally targetting an outcome
How does the IA determine the different sectors?
Performance measurement companies (such as Standard and Poors) rank the performance of funds in each sector, published weekly and monthly
The fund must have at least 80% of its assets in the relevant sector
To qualify as an Income fund, achieve a yield of no less than 90% of the relevant index
Membership is constantly revised in light of developments and new types of funds
What do supporters of index tracking funds believe?
few managers outperform consistently the index
Outperformance generally means higher risks have been taken
Index tracking funds generally have lower charges
What are the general rules that restrict investment powers of authorised funds?
The FCA’s specialist handbook - sets out rules for establishing and operating schemes, minimum standards, proportion of transferable securities and derivatives
The trust deed must contain a statement that the fund can invest only in those eligible by the FCA, or narrower investment powers if required
The investment limits of the scheme or prospectus of the scheme, in accordance with the FCA
What percentage of securities in an fund, must be within approved securities?
90%
What are the four other standards that unit trust managers, directors and trustees must meet in addition to ensuring the market is liquid?
Regulated
Operating regularly
Recognised by a statutory body or government agency
Open to the public
How often must a firm carry out a review of non EU markets they consider eligible for each fund?
Annually
What are the diversification rules applicable to unit trusts and OEIC’s imposed by the FCA?
Non index tracker funds can only hold up to 10% of the total value in any one company
The fund can only hold an aggregate of 40% up to the maximum of 10% in four seperate shareholdings
Any other must not exceed 5% - i.e. a total of not less than 15 holdings
(UCITS funds which are replicating tracker funds can hold up to 20%, and 35% in exceptional circumstances)
UCITS are limited to 20% for securities or instruments by the same group
Funds investing 35% or more in government stock, are required to invest in 6 different issues, no single stock can exceed 30% of the total value of the fund
UCITS can hold up to 10% in unapproved securities, 20% can be in another collective investment scheme
Non UCTIS can hold up to 20% and 35 % in another collective scheme
Both can hold warrants without limits
Funds can only hold cash for liquidity and cash flow purposes , no more than 20% overall
What is the difference in borrowing limits for retail UCITS and non retail UCTIS schemes
A retail scheme can only borrow up to 10% on a temporary basis (but can borrow against its property fund)
A non retail is allowed to borrow up to 10% of the fund on a permanent basis
QIS may borrow up to 100% of shceme property
What is the difference between a UCTIS and UCIS?
UCTIS meets EU requirements and can be marketed across europe ro retail investors
UCIS is unregulated and cannot be marketed to retail investors in the UK
What investments are considered as Non mainstreamand subject to marketing restrictions?
Units in QIS (qualified investor scheme)
Traded life policy investments
Units in UCIS
Securities issues by special purpose vehicles, pooling investments in assets other than unlisted or listed shares or bonds
What investments are not considered NMPI’s and fall outside marketing restrictions?
Exchange traded products
overseas investment companies that would meet the criteria for investments if based in the uk
real estate investment trusts
venture capital trusts
enterprise investment schemes and seed schemes
SPV’s pooling investments primarily in shares and bonds
What type of fund sits within the AIFMD (alternative investment fund managers directive)?
Who are they aimed at?
hedge funds private equity funds retail investment funds investment companies real estate funds
Professional and institutional investors
What are the two key roles within a trust deed?
The trustee and the manager
What are the key elements of the trustee’s role?
Checking the managers actions
Ensures the manager invests in line with the objectives of the fund
Holding/controlling the assets to ensure they are held safely
In what circumstances could a trustee fire the manager?
If the manager goes into liquidation, insolvency, receivership
if the trustee believes the manager is not acting in the unit holders interest
If the majority of the unit holders voted for removal of the manager
Who is the legal owner of the trust and in whose name are the securities registered?
The trustee
What over jobs does a trustee have in relation to the trust?
Report to the FCA if its not being managed within regulations
Arranging an audit of the trust and issuing financial statements
Monitoring the calculation of unit pricefor sale and repurchase
Arranging unit holder meetings
Setting up the register of unit holders and issuing certs
Distributing the income
Making any additional provisions for the trust to be recognised as a pension scheme or charitable scheme
Trustees are usually what type of institution?
Large bank or major insurance company
What are the fund manager’s key responsibilities?
Be authorised
Have adequate financial resources
Manage the assets in accordance with regulations and the trust deed/scheme particulars
Supply information when requested
Maintain a record of units for inspection
Notify the trustee/FCA of any breaches
Promotion, advertising, administration
What is subcontracting of fund management?
The manager may select a third party to decide how the fund is invested who may then select a third party to handle admin.
The manager retains responsbility and compliance with regulations
What does the register of a unit holders need to contain?
Name and address of unit holders
Number of units held
Date of which the holder was registered
If a certificate is not issued, what else might a holder receive?
A periodic statement
What is required to be on a certificate?
Date
Name of the scheme
Names and addresses of the manager and trustee
Number and type of units held by the holder
Name of the holder
How often should a unit trust publish reports?
half yearly and annually
What are the three levels of protection for a unit holder?
Trustees Regulatory organisations (under Financial services and markets act 2000) Complaints and arbitration procedures
If a fund manager wishes to raise charges, how much notice would he need to give?
reasonable, not less than 60 days
Can a manager be removed without the approval of the FCA?
No.
How are unit trusts taxed and how is it important to investors?
Taxed as corporation tax on Income only.
Can allow annual management expenses to be offset against non-dividend income of rtax relief purposes
Do unit trusts pay tax on capital gains or options form futures?
No
What are the different tax regimes, depending on the composition of the investments in the fund?
Less than 60% of interest barring securities pay corporation tax at 20% in income on overseas income, rent or interest
Dividends are received as franked income and flow through to dividend distributions payable by the trust so have no tax liability
More than 60% in interest barring pay an interest distribution which is deductinle for corporation tax, i.e. there is no UK corporation tax liability
What is an equalisation payment?
A payment within the first distribution of income to a unit holder, which represents the income that was included within the price paid for the units.
How is an equalisation payment treated for tax purposes?
It must be deducted from the intial purchase price to confirm the aquisition value for CGT purposes
How often is income from a unit trsut distributed?
Monthly, quarterly, 6 monthly or annually depending on the type of trust
What are the rates on income tax on trust dividend distributions from equity trusts?
- 5% for basic rate
- 5% for higher rate
- 1% for additional rate
How are trustees taxed on funds held within a discretionary trust?
liable for tax of 38.1% on income received and 2K allowance does not apply, however dvidends that fall within the standard rate band of £1000 will only be taxed at 7.5%
what is the special rate of corporation tax for OEIC’s and unit trusts?
20%
In order to pay interest distributions from a non equity unit trust or OEIC, how much needs to be held in interest barring investments?
60%
How much tax liability would a gilt or corporate bond fund within a discretionary trust have?
45%
under £1000 would be 20%
If dividends or interest is reinvested in the trust, would there be a tax liability?
Yes as it still counts as income
If a unit trust disposed of investements within the trust, would they be subject to CGT?
No as they are exempt
Is a taxpayer who disposes of units from a unit trust, be subject to CGT? If so, how is this calculated?
Yes
Disposal proceeds, less aquisition costs, less any exempt amount = taxable gain
any equalisation payment would be deducted from the aquisition costs
What is bed and breakfasting?
selling units and buying back the following day to avoid changing units, used to realise gains or losses
Why is bed and breakfasting no longer effective?
there has to be an interval of at least 30 days
What are the alternatives for investors wanting to retain existing investments after realising a gain or loss?
selling units and buying back with a ISA
selling units and arranging for a spouse or civil partner to buy them back
Selling and repurchasing in a very similar unit trust
How are switching funds treated as part of an OEIC that is an unbrella fund?
Treated as a disposal, however exempt if it a fund of funds.
What is the intention of a TEF?
Moves the point of taxation from the TEF to the investor.
The are entitled to receive a deduction up to the same amount to offset the taxable income that would be ordinarily liable to income tax.
What is the most popular reason for investing in a unit trust?
Investors can benefit from capital gains and income, however the income largely comes from dividends
What are the options open to investors in terms of how they receive the income from a unit trust?
The income is added to the investors holding as accumulation units
They can receive as income units
However - some funds specify what is available - i.e. just income, just accumulation or a mix of the two, or the option of buying more units (however would be subject to intial charges)
What is the impact of allocations on unit prices and accounting periods?
As the fund approaches the accounting day, prices rise
Once passed the price falls by the amount of income
If unit holders buy during the ex-distribution period, the get the allocation attributable in the previous period, buyers will not.
Prices are marked xd for no more that 4 months after the end of the accounting period, be it annual or interim
