8) Collective Investments Flashcards
Collective (Pooled) Investments
+ Services of a skilled investment manager obtained at a cost shared among investors.
+ Diversification - Investment risk can be reduced as investment manager spreads the fund by investing in a large number of different companies.
Spread by geographical location, asset classes and sectors of the economy.
+ Fund managers can negotiate reduced dealing costs.
+ Wide choice of funds catering for all investment strategies, preferences and risk profiles.
+ Gain exposure to investments they would not normally due to minimum lot/ investment size.
Categories of Investment Funds
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Type of investment
Other forms of specialisation, eg ethical
High levels of income with modest capital growth
High levels of capital growth at the expense of income
Balance between income and growth
Actively Managed - managed services use fund managers to make decisions on asset selection and when holdings should be bought and sold.
Passively Managed - or tracker funds will seek to replicate the performance of a particular stock market Index such as FTSE all-share. Could be done by a manager or computerised.
Unit Trusts
Pooled investment created under trust deed. Means of trying to produce a better return. Lump sum or regular contributions or both. Categorised as an EQUITY TRUST where the underlying assets are shares (pays a dividend). Or as a FIXED-INCOME TRUST where investment is mainly in interest yielding assets (pays interest).
Divided into units, open ended - trust manager can create more units.
- Accumulation Units - automatically reinvest any income generated by the underlying assets. Suitable if looking for capital growth.
- Distribution or Income Units - take the income and distribute to unit holders. Units may also increase in value in line of the value of underlying assets.
Price of Units
Total value of trust assets - appropriate costs ÷ number if units issued. Calculation specified in trust deed.
Creation Price - price at which trust manager creates units.
Offer Price - price at which investors buy units from trust managers.
Bid Price - price at which managers will buy back units from investors who wish to cash in all or part of their unit holdings.
Cancellation Price - minimum permitted bid price with costs of buying and selling.
Bid-Offer Spread - between 3-5%
Difference between Offer Price and Bid Price.
Single Pricing Unit Trusts
Considering net flows of the fund.
NET INFLOW - subscriptions ⏫️ redemptions
NET OUTFLOW - subscriptions ⏬️ redemptions
Forward Pricing - standard practice - price based on the end of the dealing period, due to taking into account delays caused by administration.
Historic Pricing - closing price at end of the previous dealing period. Still in use, but if an underlying market in which trust is invested moves by more than 2% in either direction since last valuation, must change to Forward Pricing.
How are Units Bought/ Sold
Unit trust managers obliged to buy back units.
No need for secondary market, not traded on Stock Exchange. Simple to buy and sell. May receive:
- Contract Note - specifies fund, no of units, unit price, amount paid. Needed for CGT purposes when sold.
- Unit Certificate - specifies fund and no of units. Proof of ownership of units.
If purchased through intermediate, units may be uncertified, receiving regular statements instead.
To sell, holder signs the back of the Unit Certificate - form of renunciation.
Unit Trust - Who Regulates and Manages
In UK, regulated under terms of Financial Services and Markets Act 2000 and authorised by Financial Conduct Authority if marketed to retail investors.
Rules require a unit trust fund to be suitably diversified and specify fund cannot borrow more than 10% of funds net asset value and only for a temporary period.
Trust deed places obligations on both managers and trustees. Manager aims to generate profit and trustee’s ensure investors are protected and manager is complying with terms of trust deed. Trustee usually carried out by institutions such as clearing bank or life company.
Manager - Manages trust fund in line with trust deed.
- Valuing assets of fund
- Fixing price of units - Offering units for sale - Buying back units
Trustees - Set out trust investment directives
- Holding/ controlling trust assets
- Investor protection procedures
- Approving advertising/ marketing materials
- Collecting/ distributing income from trust assets
- Issuing unit certificates (if used)
- Supervising maintenance of register of unit holders
Charges
Initial Charge - costs of purchasing, typically covered by bid/ offer spread
Annual Management Charge - for professional investment manager, typically between 0.5 - 1.5%
Annual, but deducted on daily or monthly basis.
How are unit trusts taxed?
P 142
