7 Indirect investments Flashcards
(245 cards)
1
Q
Who classifies unit trusts & OEICs?
A
The Investment Association (IA)
2
Q
Where are the rules for unit trusts & OEICs?
A
FCA sourcebook COLL (Collective Investment Schemes)
3
Q
Trustees/directors must ensure markets are:
A
- Liquid
- Operating regularly
- Regulated
- Recognised (e.g. by statutory body or government agency)
- Open to the public
4
Q
What size single holding may UCITS non-tracker funds have?
A
Up to 4 at 10%, and no others may exceed 5%
5
Q
What size single holding may UCITS tracker funds have?
A
20%, or 35% in exceptional circumstances
6
Q
What proportion of a company/group’s securities may a UCITS fund hold?
A
20%
7
Q
A single gilt issue must not make up more than __ of a fund’s value.
A
30%
8
Q
How much may UCITS funds invest in other collective schemes?
A
20%
9
Q
How much may non-UCITS funds invest in other collective schemes?
A
35%
10
Q
How much may UCITS funds invest in unapproved/unlisted securities?
A
10%
11
Q
How much may non-UCITS funds invest in unapproved/unlisted securities?
A
20%
12
Q
How much dividend income is tax-free?
A
£2,000
13
Q
How much tax do basic-rate taxpayers pay on dividends?
A
8.75%
14
Q
How much tax do higher-rate taxpayers pay on dividends?
A
33.75%
15
Q
How much tax do additional-rate taxpayers pay on dividends?
A
39.35%
16
Q
What is a personal savings allowance (PSA)?
A
Tax-free interest income
17
Q
What is the personal savings allowance for a basic-rate taxpayer?
A
£1,000
18
Q
What is the personal savings allowance for a higher-rate taxpayer?
A
£500
19
Q
What is the personal savings allowance for an additional-rate taxpayer?
A
None
20
Q
What is the annual exempt amount for capital gains tax?
A
£12,300
21
Q
To qualify for an IA sector, how much must generally be invested in the relevant asset class?
A
80%
22
Q
To qualify as an income fund, what yield must a fund achieve?
A
90% of the relevant index annually
23
Q
What does UCITS stand for?
A
Undertakings for Collective Investment in Transferable Securities
24
Q
What is the limit on funds holding warrants?
A
None
25
What is the regulatory limit on funds holding cash?
None
26
Why might a fund hold cash?
Liquidity and cash flow
27
In practice, how much of a fund is typically held in cash?
Around 5%
28
How much may a retail UCITS scheme borrow on a permanent basis for gearing purposes?
None; gearing is not allowed for retail UCITS schemes
29
How much may a UCITS scheme borrow temporarily against known future cash flow, such as dividends?
10% of its value
30
How much may a non-retail UCITS scheme borrow on a permanent basis for gearing purposes?
10% of its value
31
How much may a QIS borrow?
100% of its value
32
What does AIF stand for?
Alternative investment fund
33
What are examples of AIFs?
Hedge funds and private equity funds
34
If gilts make up more than __ of a fund’s value, these holdings must consist of at least __ different issues.
35% / 6
35
What does QIS stand for?
Qualified investor scheme
36
Where are the rules for AIFs?
FCA sourcebook FUND (investment funds)
37
What does UCIS stand for?
Unregulated collective investment scheme
38
May a NMPI be marketed to retail investors?
No
39
What does NMPI stand for?
Non-mainstream pooled investment
40
What are examples of NMPIs?
1. UCIS
2. QIS
3. Traded life policy investments
4. SPV securities with underlying investments other than shares/bonds
41
What does SPV stand for?
Special purpose vehicle
42
What does AIFMD stand for?
Alternative Investment Fund Managers Directive
43
Unit trust trustees are typically...
Large banks or insurance companies
44
Who arranges audits of a unit trust and issues financial statements to unitholders?
The trustee
45
Who arranges unitholder meetings?
The trustee
46
Who is responsible for registering unitholders and issuing certificates?
The trustee, though they will often delegate to the manager
47
Who distributes income to unitholders?
The trustee
48
Who manages a unit trust's assets?
The manager
49
What is a typical management fee for a unit trust?
0.5% - 1.5%
50
Who is responsible for promoting and advertising a unit trust?
The manager
51
Who is responsible for a unit trust's administration?
The manager
52
A unit trust's register must contain:
1. Name & address of the unitholder
2. Number & type of units they hold
3. Date the holder was registered
53
Are unitholders allowed access to the register?
Yes, free of charge at all times during normal office hours (but trustee may close it for up to 30 days a year)
54
A unit trust certificate must contain:
1. The date
2. The name of the scheme
3. The names & addresses of the manager & trustee
4. The name of the unitholder
5. Number & type of units they hold
55
May unit trust managers issue short form accounts?
Yes, provided full accounts are available to unitholders on request
56
May a unit trust manager materially alter the trust deed?
Only if approved by a unitholder meeting
57
May a unit trust manager raise charges?
Yes, with 60 days' notice
58
Where are a unit trust's management fees set out?
In the trust deed
59
May a trustee remove a unit trust manager?
Yes, with the FCA's approval, if unitholders are at risk
60
How much capital gains tax do unit trusts pay?
None
61
What kind of tax, and how much, do unit trusts pay on income/gains from options & futures?
None
62
What tax regime applies to unit trusts?
It depends on the composition of investments
63
What tax, and how much, do unit trusts pay on interest & rental income?
Corporation tax at 20%
64
What is an equalisation payment?
A partial refund included with a unitholder's first distribution
65
What tax applies to an equalisation payment?
None; it is a refund, not income
66
How much is an equalisation payment?
The income accrued between the last distribution and the date of purchase
67
How many times per year do unit trusts distribute income?
At least 1, usually 2, sometimes 4, and often 12 for income trusts
68
To pay dividends, a unit trust must hold...
Less than 60% of its value in interest-bearing investments
69
What type of tax applies to dividends?
Income tax
70
What is the tax-free dividend allowance for trustees?
None
71
To pay interest distributions, a unit trust must hold...
At least 60% of its value in interest-bearing investments
72
What is the PSA for trustees?
None
73
If unit trust dividends/interest are reinvested instead of distributed, does the investor pay the same tax?
Yes
74
For CGT purposes, units held on __ __ ____ have an acquisition cost = their value on that date
31st March 1982
75
When disposing of units, how do you calculate the acquisiton cost for CGT purposes?
Subtract the equalisation payment from the initial price paid
76
Does switching between an umbrella fund's sub-funds count as disposal for CGT purposes?
Yes
77
What does TEF stand for?
Tax-elected fund
78
How do TEFs distribute to investors?
Interest & dividends separately, and gross of tax
79
Why become a TEF?
To shift point of taxation to investor
80
What happens if a unit trust deducts charges from capital instead of from distributions?
The quoted yield is higher but the capital performance suffers
81
If a unit trust deducts charges from the capital, it must...
1. Include a prominent statement on all documentation
2. State the resulting risk to capital growth
82
Which is more expensive to buy: income or accumulation units?
Accumulation units
83
What kind of units always reinvest income?
Accumulation units
84
Are accumulation units better for investors than buying more income units?
Yes, as you may have to pay all/part of the initial charge for new units
85
When are units most expensive?
Just before distribution
86
By how much does unit price typically fall after distribution?
The amount of income
87
How long does the xd period last?
Up to four months
88
What happens if you sell units during the xd period?
You still get the allocation attributable to the previous period
89
What proportion of UCITS funds qualify for stocks & shares ISAs?
100%
90
Do cash funds qualify for cash ISAs?
Yes
91
Do unit trusts have minimum holding requirements for investors?
Yes, typically £500 or £1,000
92
Do unit trusts have maximum holding limits for investors?
No
93
Unit trust savings schemes (often linked to ISAs) typically start at __ to __ per month
£50 - £100
94
Why would you complete a renunciation form?
To sell unit trust units back to the manager
95
If you arrange to buy/sell units over the phone, is it legally binding?
Yes
96
Where & when would a unit trust management group send out a contract note?
To an investor after units are bought or sold
97
Before executing a purchase, unit trusts must supply investors with...
A KIID (Key Investor Information Document)
98
After receiving a renunciation form, how long does a unit trust manager have to make payment?
4 days
99
What is a unit trust share exchange scheme?
Swap shares in public companies for equivalent value of units
100
Most unit trust share exchange schemes accept a minimum value of...
Around £1,000
101
Does using a unit trust share exchange scheme count as disposal for CGT purposes?
Yes
102
Unit trust managers may elect to operate under __ or __ pricing regulations
Single or dual
103
Under dual pricing, which is higher: bid or offer price?
Offer (buying) price, the price at which investors buy units
104
Under dual pricing, what is the bid price?
The lower (selling) price at which investors sell units back to the trust
105
Under dual pricing, is the initial charge included in the bid-offer spread?
Yes, it's added to the offer price
106
Under single pricing, how is the unit price calculated?
Using mid-market prices for the underlying investments
107
What would the bid-offer spread look like for a unit trust with highly liquid investments (e.g cash or gilts)?
Low: less than 1% or even 0% for some cash funds
108
What would the bid-offer spread look like for a unit trust with less liquid investments (e.g. property)?
High: typically 5% - 7%
109
What would the bid-offer spread look like for a unit trust with less liquid investments (e.g. property)?
High: typically 5% - 7%
110
What does it mean if a unit trust is on an offer basis?
The manager has set the offer & bid prices towards the offer (higher) end of the range, as demand is high
111
What does it mean if a unit trust is on a bid basis?
The manager has set the offer & bid prices towards the bid (lower) end of the range, as demand is low
112
What is a 'valuation point' for a unit trust?
The time of day when the manager evaluates the trust's property
113
How often is a unit trust's property evaluated?
Usually daily. The manager must state the frequency in the scheme particulars
114
What does it mean if a unit trust uses forward pricing?
It deals at the price to be calculated at the next valuation point
115
What does it mean if a unit trust uses historic pricing?
It deals at the price calculated at the last valuation point
116
Which is more common for unit trusts: forward or historic pricing?
Forward pricing
117
Under what circumstances can an investor force a unit trust manager to switch to forward pricing?
If the value of the trust is believed to have changed by 2% or more since the last valuation
118
What charges may be associated with investing in a unit trust?
1. Initial
2. Annual (AMC)
3. Performance
4. Exit (within 5 years)
5. Legal / audit fees
119
For a unit trust, what is an OCF?
Ongoing charges figure - includes the AMC and any other costs
120
For a unit trust, what is an AMC?
Annual management charge
121
What is another name for an OEIC?
ICVC (investment company with variable capital)
122
What are three ways to establish an OEIC?
1. Retail UCITS
2. Non-retail UCITS
3. QIS
123
Are OEICs governed by the Companies Acts?
No
124
Who holds the assets of an OEIC?
An independent depository, authorised by the FCA
125
For an OEIC, what is an ACD?
Authorised Corporate Director
126
Where are the rules for selling & marketing OEICs?
FCA sourcebook COBS (Conduct of Business)
127
True or false: some sub-funds within an umbrella OEIC may use forward pricing while others use historic pricing
False: all sub-funds must use the same pricing basis
128
True or false: like unit trusts, OEICs may use single or dual pricing
True, though they usually use single pricing
129
Who is responsible for an OEIC's compliance with investor protection requirements?
The ACD
130
Who is responsible for maintaining an OEIC's register?
The ACD
131
How often do OEICs report to shareholders?
Twice a year: interim (unaudited) and annual (audited)
132
True or false: OEIC shares can be held in ISAs
True
133
What is a dilution levy?
A charge sometimes applied by single-price basis OEICs to cover dealing costs and the price spread of underlying investments
134
Is a dilution levy applied when buying or redeeming shares in an OEIC?
It can be applied to both
135
Are contract notes issued by unit trusts or OEICs?
Both
136
True or false: OEICs can be marketed internationally more easily than unit trusts
True, as the structure is widely recognised in Europe
137
True or false: OEICs may have multiple share classes
True
138
True or false: unit trusts and OEICs can offset management charges against dividend income for tax purposes
False. Unit trusts and OEICs can offset management charges against interest income for tax purposes
139
What does a "fund of funds" do?
Invests directly in other managers' funds
140
What does a "manager of managers" fund do?
Appoints specialist managers to look after different parts of the portfolio
141
What does it mean if a "fund of funds" is "fettered"?
It can only invest in funds run by the same management group
142
How can a "fund of funds" mitigate the underlying funds' charges?
Negotiating a rebate or buying an institutional class of unit/share with lower charges
143
What is a tax advantage of a "fund of funds"?
Managers can switch their investment between other funds without paying CGT
144
True or false: a "manager of managers" fund charges a separate AMC for each manager
False. Their fees all come out of a single AMC
145
Where are offshore funds typically based?
The Channel Islands or the Isle of Man
146
True or false: offshore funds may be marketed to UK retail investors without FCA recognition
False
147
While waiting for FCA recognition post-Brexit, EEA funds may market in the UK under the...
Temporary Marketing Permissions Regime (TMPR), until the end of 2023
148
What is the European equivalent of unit trusts?
"Fonds commun de placement" (FCP)
149
What is the European equivalent of OEICs / ICVCs?
"Société de investissement à capital variable" (SICAV)
150
True or false: due to fewer restrictions, offshore funds may be more specialised than UK funds
True, although highly specialist or speculative funds are not usually FCA recognised
151
Offshore funds with FCA approval can generally be marketed normally, but not following...
Cold-calling
152
If an offshore fund's manager is not part of a UK regulatory body, what extra rule applies to its advertising?
All adverts must be approved by a member of a suitable regulator
153
For tax purposes, what are the two types of offshore funds?
Reporting and non-reporting
154
Do most UK-resident/domiciled investors prefer reporting or non-reporting funds?
Reporting funds
155
What is the main advantage of reporting funds?
The usual UK tax rules apply to dividends, interest, and CGT on disposal
156
What might disqualify a reporting fund from the usual CGT rules?
If it did not retain reporting status throughout the investor's period of ownership
157
What is the tax treatment of dividends from offshore funds constituted as companies?
They are treated as foreign dividends, subject to income tax, like dividends from equities
158
Under what circumstances would distributions from an offshore fund be treated as interest for tax purposes?
If more than 60% of its assets are interest-bearing investments
159
May interest from an offshore fund be offset against the investor's PSA?
Yes
160
True or false: a reporting fund is required to distribute all its income
False. However, investors are taxed for their share of the income, even if the distribution is not received
161
What does a reporting fund report, and to whom?
Its income, to HMRC
162
Non-reporting funds are usually...
Roll-up funds, i.e. all income is accumulated and no dividends are paid
163
What is the tax treatment of gains from non-reporting funds?
That gain is calculated using CGT rules but then taxed as income, so the CGT exempt amount does not apply
164
Why might a UK resident use an offshore roll-up fund?
To shelter accumulated income & realise it later, when their tax band has dropped or they are no longer a UK resident
165
What benefit do non-domiciled investors gain from offshore investments?
Their IHT liability is only based on their UK assets
166
What does AEOI stand for?
Automatic Exchange of Information
167
What is an example of AEOI in practice?
Foreign banks share information with HMRC about their UK resident customers, to help detect tax avoidance & evasion
168
Do offshore equity funds tend to focus on income or growth? Why?
Growth, as withholding taxes erode income
169
What is an offshore fund sector with no UK equivalent?
Currency funds, including single and managed currency funds
170
What is an investment trust company?
A closed-ended investment fund and a type of public limited company
171
Subject to any restrictions in their articles of association, investment trusts may invest in:
1. Public or private companies
2. Venture capital
3. Any country
172
Who classifies investment trusts?
The Association of Investment Companies (AIC)
173
Why are investment trusts described as "closed-ended"?
They issue a fixed number of shares, which are traded on the London Stock Exchange
174
Are investment trusts allowed to gear?
Yes
175
What is a self-managed trust?
An investment trust which directly employs its own salaried fund manager(s)
176
What is a more common way of running an investment trust than self-managed?
Hiring an external management group which also provides admin, registration and accountancy
177
Who is responsible for looking after shareholders' interests in an investment trust?
The independent board of directors
178
What are terms for the difference between the bid & offer price of investment trust shares?
The market makers' spread or turn
179
Which have narrower spreads: large, generalist trusts or small, specialist trusts? Why?
Large trusts, as there is generally more demand & more stock availability
180
How would you calculate the shareholders' funds for NAV purposes?
1. Mid-market prices for listed investments
2. Plus unlisted investments as valued by directors
3. Plus cash & any other assets
4. Less nominal value of loans, debentures & preference shares
181
How would you calculate diluted NAV per share for an investment trust?
Assume all outstanding warrants & convertible loan stocks will be exercised
182
If an investment trust has 100 outstanding warrants at £1 per share, what effect would this have on the diluted NAV per share?
The shareholders' funds would increase by £100, but the number of ordinary shares would increase by 100
183
What does it mean when an investment trust is trading at a discount?
The share price is lower than the NAV per share
184
Which is less common: trading at a discount or trading at a premium?
Trading at a premium
185
How are discounts/premiums expressed?
As a percentage of NAV per share
186
What does a narrowing discount mean for an investor?
The trust is delivering a better ROI than its underlying investments
187
How might an investment trust manager combat a wide discount?
Buying back shares to reduce supply
188
True or false: an investment trust may be actively involved in the management of companies in which it invests
False
189
Does the FCA require investment trusts to seek HMRC approval?
Yes, under the Income & Corporation Taxes Act 1988, but they may operate without approval
190
How does HMRC approval benefit an investment trust?
It will not pay CGT on sales of shares
191
What are the requirements for HMRC approval of an investment trust?
1. Resident in UK & not "close" (controlled by 5 people)
2. Ordinary shares listed on London Stock Exchange
3. Does not retain more than 15% gross income
192
What are the types of capital structure for investment trusts?
1. Conventional trusts
2. Split capital trusts
193
What characterises a conventional trust?
Issues one main share class (ordinary shares) which entitles the holder to all income & gains
194
True or false: conventional trusts are usually set up for an indefinite term
True. Some are over 100 years old
195
What is a limited life conventional trust?
When the term expires shareholders vote to continue for 3 years at a time
196
What is the benefit of a limited life conventional trust?
As the winding-up date nears, discount should narrow, as investors might obtain full value of assets
197
True or false: shareholders may vote to wind up even indefinite conventional trusts at any time
True, as with all public limited companies
198
What characterises a split capital investment trust?
2 - 4 share classes entitled to different returns, with different priority on winding-up
199
What does it mean if a split capital investment trust offers units?
Packages of all its share classes, equivalent to an ordinary share in a conventional trust
200
Do split capital investment trusts have an indefinite lifespan?
No. Their initial lifespan is typically 5 - 10 years
201
What does redemption yield measure?
Capital & income return on a particular share until wind-up
202
What does it mean if a share has a redemption yield of 7%?
If you buy it now and hold it until wind-up, it will grow in value by 7% per year
203
What is a hurdle rate?
The rate investments must grow per year for the fund to repay share classes at wind-up
204
What is a wipe-out rate?
The rate investments must shrink per year for the fund to repay no capital at wind-up
205
What does a hurdle rate of -2% mean?
The fund has surplus assets & can afford to shrink by 2% per year until wind-up
206
What is asset cover?
An investment trust's ability to meet its liability to share classes with pre-determined redemption price
207
How is asset cover expressed?
Decimal fraction or percentage (e.g. 0.5 or 50%)
208
What typically happens when a split capital investment trust reaches its redemption date?
Instead of winding up, managers offer investors roll-over investment vehicle with no CGT, or cash alternative
209
What are zeros?
Zero dividend preferential shares in a split capital investment trust
210
What's one reason to buy zeros?
You're not already using your CGT exemption
211
What are three types of income shares in a split capital investment trust?
1. Traditional (redemption value = initial value)
2. "Annuity-style" (nominal redemption value)
3. Ordinary (no redemption value, surplus capital only)
212
In a split capital investment trust, what are capital shares entitled to?
Surplus capital only
213
What are three main types of shares in a split capital investment trust?
1. Zeros
2. Income
3. Capital
214
What is a warrant?
Right to buy shares at set "exercise price," on set date/within set period
215
Are warrants high or low risk?
High
216
True or false: warrants can be traded on the London Stock Exchange until their final exercise date
True
217
How do investment trusts typically use warrants?
As "sweeteners" for investors (buy 5 shares, get 1 warrant free)
218
Why might an investment trust repurchase its own warrants?
To prevent NAV dilution
219
What are the two "rates" for an investment trust?
Hurdle rate and wipe-out rate
220
What is a share buyback?
An investment trust buying back its own shares, typically to narrow the discount
221
What must an investment trust do before a share buyback?
Get shareholders' permission
222
Are investment trusts allowed to gear?
Yes
223
How is financial gearing expressed?
(total gross assets / net assets) x 100
A result of 120 means the fund is 20% geared i.e. 20% of the assets are borrowed
224
Besides optional financial gearing, split capital investment trusts inherently involve...
Structural gearing
225
What is structural gearing?
Low priority share classes = higher risk
226
What is a COBS rule on gearing?
Advisors must provide enhanced risk warning to clients if they recommend significantly geared trusts
227
What could typically be considered "significant" financial gearing?
30% +
228
What are typical AMCs for older / general investment trusts?
Low: typically under 0.5%
229
What are typical AMCs for newer / specialist investment trusts?
High: typically 0.5% - 2% or more
230
What kind of document must UCITS funds provide to investors?
Key information document (KID)
231
What does TER stand for?
Total expenses ratio
232
What is the main difference between AMC and TER?
TER includes any performance fees
233
What are typical charges for a savings & investment scheme?
- Initial charge (often 0.2% - 1%)
- Stamp duty/SDRT (0.5%)
234
What is an advice note?
Sent by savings & investment schemes to investors in place of a certificate, if their shares are held in nominee account to keep costs down
235
What is franked income?
Tax-free dividends paid by one UK company to another
236
What tax do investment trusts pay?
Corporation tax on interest income, but offsetting expenses means they often pay little or no tax
237
True or false: CGT is only chargeable if TOTAL gains, AFTER deduction of losses, exceeds the exempt amount
True
238
Compared to OEICs/unit trusts, investment trusts typically...
1. Have lower initial & annual charges
2. Come with greater risk/reward
239
Why do unit trusts have greater risk/reward than OEICs/unit trusts?
1. As there are limited shares, their price will rise/fall more dramatically
2. Investment trusts are allowed to gear
240
What is the basic rate income tax band?*
£12,571 - £50,270
241
What is the higher rate income tax band?*
£50,271 - £125,140
242
What is the additional rate tax band?*
£125,141 +
243
How much is income tax?
1. Basic 20%
2. Higher 40%
3. Additional 45%
244
What is the income tax personal allowance?*
Up to £12,570
245
How much is regular CGT?
1. 10% for basic rate taxpayers
2. 20% for higher & additional rate taxpayers
