Chapter 11: Collective investment schemes

Question 1

What are the advantages (10) and disadvantages (3) of CIS

Answer 1

+ Gain specialist expertise
+ Diversification
+ Avoid costs associated with direct investments
+ Holdings are divisible
+ Tax advantages
+ Can be more/less marketable than underlying assets
+ Can be used to track returns on an index
+ Access to large and unusual markets
+ Benefit from economies of scale, larger schemes can get preferential dealing cost
+ Don’t need a large amount of funds

• Loss of control
• Management charges
• Can have tax, e.g., withdrawal tax

Question 2

What is a close-ended scheme?

Answer 2

Once the initial tranche of money has been invested, the fund is closed to new money. After launch, the only way to get into is to find a willing seller because there is a fixed amount of shares (similar to ordinary shares)

Question 3

What is a open-ended scheme?

Answer 3

Investment managers can create or cancel units

Question 4

What is an investment trust company?

Answer 4

• Public company typically with quoted shares and governed by company law
• Stated investment objective
• Investor buys shares
• Close-ended
• Can invest in wider range underlying assets
• Allowed to gear (debt financing through bonds)

Question 5

What is a unit trust?

Answer 5

• Trust in the legal sense, governed by trust law
• Stated investment objective
• Investors buy units
• Open-ended
• Marketability guaranteed (except for cases e.g.,property units where it can be deferred)
• More restrictions on underlying assets
• Limited gearing

Question 6

How are shares in an ITC priced and what are the associated charges

Answer 6

Price:
* Determined by supply and demand
* Share price at discount to NAV per share.
* Share price at premiumto NAV per share.

Charges
* Stock broker feed
* Bid-offer spread
* Management charge

Question 7

What is NAV per share

Answer 7

MV assets - MV liabilities / # ordinary shares

Question 8

Why would the share price be at a discount to NAV in an ITC

Answer 8

• Shares in the ITC are less marketable than the underlying assets
• Investors do not rate the managers very highly
• Reflection of ITC charges
• investors get access to underlying assets cheaply

Question 9

How are shares in a UT priced and what are the associated charges

Answer 9

Price
* Unit price = NAV per unit (no discount or premium)

Charges
* Initial charge via bid-offer spread
* Annual management charge

Question 10

Who are the parties involved in an ITC that oversees the:
* Day-to-day decision making
* Governance

Answer 10

Day-to-day decision making
* Fund managers (merchant banks, specialist management companies)

Governance
* Board of directors which is responsible for the direction of the company, accountable to shareholders and ensures regulation is met

Question 11

Who are the parties involved in a UT that oversees the:
* Day-to-day decision making
* Governance

Answer 11

Day-to-day decision making
* Fund managers (e.g., life insurers, specialist management companies)

Governance
* Trustees who ensure the trust deed is obeyed, oversees pricing, admin, custodian of assets and ensure regulation is met