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Who is in charge of unit trusts and OEICs?



What are the four high level Investment Association Sectors?

  • Income
  • Growth
  • Capital Protection
  • Specialist



What percentage of a funds holdings must be in a particular sector for it to be a sector fund?




What are the two FCA books covering collective investments?

COLL - Collective investment schemes

FUND - Investment Funds


Approved Securities

What are the two main rules around approved securities?

  1. You can invest in approved securities without any further enquiry.
  2. At least 90% of holdings must be in approved securities


Approved Securities

If a security isn't approved (i.e. from an approved market) what features must it's marketplace have (5)?

  • Liquid
  • Regulated
  • Operating Regularly
  • Recognised
  • Open to the public



Limits on UCITS funds holding equities (except index trackers)

  • Maximum investment in any equity is 10%, you can have 4 of these
  • Maximum investment of remaining equities is 5%
  • As a result the portfolio will always have at least 16 shares



Rules for index trackers

20% maximum holding

Up to 35% in exceptional circumstances



Gilt fund rules

If a fund invests at least 35% in Gilts they must hold at least 6 different stocks (i.e. types of gilt) and no more than 30% in any single stock.



What are the gearing restrictions on UCITS funds?

UCITS funds can only borrow up to 10% of their fund value.

Retail UCITS can only do this temporarily, non-retail can do it permanently.


Unauthorised Funds

Two names for unathorised funds

What are their restrictions?

Unauthorised firms are referred to as UCIS or NMPI (non-mainstream pooled investment).

They CANNOT be marketed to retail investors, but can be sold to professional investors, high net worth etc.



What is this?

Relation to UCITS.

Alternative Investment Fund Management Directive

It governs marketing and management of alternative investment funds (AIF).

Includes Hedge Funds, Private Equity, Real Estate

AIFs are not subject to UCITS


Unit Trusts

What documents governs them?

Trust Deed (main one)

Scheme Particulars


Unit Trusts

Who is responsible for:

  • Managing Investments
  • Day to day operations
  • Marketing
  • Safeguarding and holding Assets
  • Register of unit holders
  • Record of units
  • Distribution of income

  • Managing Investments - Manager
  • Day to day operations - Manager
  • Marketing - Manager
  • Safeguarding and holding Assets - Trustees
  • Register of unit holders - Trustees
  • Record of units - Manager
  • Distribution of income - Trustees


Units Trusts

What documentation do investors tend to receive these days instead of certificates?

What reporting must the trusts do?

Receive periodic statements instead of certificates (generally)

Must publish semi-annual reports


Unit Trust/OEIC Tax

Internal taxation

  • They pay corporate tax on earnings; but
  • Don't pay tax on UK dividends;
  • Don't pay tax on gains;
  • Always pay tax on foreign income/gains etc.;
  • Withhold 20% tax on any interest distributions


Unit Trust/OEIC Taxation

Taxation of the investor

  • Normal tax on dividends (£5k free, 0%, 7.5%, 32.5%, 38.1%)
  • Normal tax on interest (except 20% has been withheld, so they can claim this back)
  • Normal tax on capital gains


Unit Trust/OEIC Taxation

What is equalisation?

What is the tax impact?

Equalisation is a bit like accrued interest with bonds.

Unit trusts usually pay income semi-annually so you "accrue" income while holding the units.  If you sell before the income payment the price will include an "equalisation payment", the equivalent of accured interest on a bond.

If you bought the unit trust, when you eventually receive the income, part of it is a kind of refund for the equalisation payment you had to pay.  So HMRC says you don't have to pay income tax on it, BUT your purchase price for CGT excludes the equalisation payment.


Which collective investments can go into ISAs?

All UCITS funds can go into ISAs


What are dual and single pricing?

Dual pricing is when there is a bid and offer price for the fund.  It includes the charges and the FCA places a restriction on the size of the spread.  The fund can stay inside that range and might move up or down within it to manage demand.

Single pricing is when a single price is published to buy and sell, with charges disclosed separately.


Which of these items would be included in the ongoing management charge?

  • Initial fee
  • Exit fee
  • AMC
  • Performance Fees

Only the AMC.  The others are not regular annual costs so can't be put into an overall annual charge calculation.



Who is responsible for:

  • Register of shareholders?
  • Safekeeping of assets?
  • Compliance with regulations?
  • Day to day management?
  • Preparing accounts?
  • Managing investments?

  • Register of shareholders - ACD
  • Safekeeping of assets - Depositary
  • Compliance with regulations - ACD
  • Day to day management - ACD
  • Preparing accounts - ACD
  • Managing investments - ACD


Dilution Levy

Which investment type uses the dilution levy?

What is it for?

Is there an alternative?

Dilution levy is used by OEICs.

It is used to cover dealing costs in the case of large inflows or outflows from the fund.

Alternative is to use swing pricing (shifting to the bid or offer side) to manage demand and costs.


Offshore Funds

What is the tax treatment of a reporting fund?

Reporting funds are basically taxed the same as normal onshore funds.


Offshore Funds

What is the taxation of non-reporting funds?

Non-reporting offshore funds are typically roll-up funds (returns rolled up instead of paid out as income).

Thus taxed on the gain, but based on income tax not CGT (no CGT allowance).


Offshore Funds

Which types of investment are suited to offshore funds and why?

All offshore funds (reporting and non-reporting) must withhold tax on income payments, which is not reclaimable.

As such they tend to focus on growth investments (low/zero coupon bonds, low dividend equities etc).

This is also the reason that non-reporting funds use the roll-up basis.


Closed Ended Funds/Investment Trusts

Key differences to OEICs/Unit Trusts

  • They can invest in any country, any share (fewer restrictions)
  • Can leverage freely
  • Closed Ended
  • Fees tend to be lower


Closed Ended Funds/Investment Trusts

What is diluted NAV?

How do you calculate it? 

Diluted NAV is the NAV that would result if all convertibles, warrants, options (etc) were exercised.  It reflects the fact that even though the NAV per share might currently be £X, if holders of options were to exercise them it would probably be lower.

NAV per share = Net Assets / # shares

For each set of warrants, calculate how much cash they pay to exercise (add this to the Net Assets) and how many shares they would get (add this to the number of shares) and recalculate the ratio.


Closed Ended Funds/Investment Trusts

If a fund has Net Assets of £12m and 9m shares what is the NAV?

If there are 1m outstanding warrants with a strike price of 50p, what is the diluted NAV?

NAV = £12m / 9m = £1.33

If all warrants are exercised the holders have to pay 50p * 1m = £500k, so the number of shares increase by 1m and the net assets increase by £500k.

Diluted NAV = £12.5m / 10m = £1.25


Closed Ended Funds/Investment Trusts

Regulatory Status

They're regulated by the Companies Act

FCA lays down their principles and requires HMRC registration

They don't deal directly with the public

They are Public Limited Companies (Plc not Ltd)