Chapter 16 Flashcards by Toby Hill

3 types of basic financial intermediary

Banks

Contractual institutions - pension and life funds

Investment intermediaries - hedge funds

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Advantages of collective investment vehicles

Pooling investments lowers investment costs
Professionally managed
Greater diversification
Possible to achieve specialisation
Access to foreign investments

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Disadvantage of collective investment vehicles

Cannot choose individual investments in portfolio

Manager performance is variable

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4 main types of investment vehicle

Open ended investment companies
Unit trusts
Investment trusts
Life assurance based schemes

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Which investment vehicle is open and closed ended

Open ended investment company and unit trust are open

Investment trust is closed

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What are collective investment vehicles regulated by

FCA

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What are the regulated collective investment vehicles

Open ended investment companies
Authorised unit trust
Recognised scheme permitted to operate in Uk

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What can authorised schemes be split into

Ucits
QIS
Non ucits

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Three institutions involved in unit trust

Unit trust manager
Trustee
Investment manager

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How can authorised unit trusts price their trust

Dual pricing

Single pricing

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Unit trust is authorised if manger and trustee are ….

Independent of each other
Each be a company in operated in eu or uk
Have place of business in uk
Be an authorised person

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Who looks after defunds for open ended investment company

Depository - usually a bank

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Transferable securities ?

Securities to which title can be freely transferred like shares

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Features of important borrowing and investment powers for uk ucits are

Up to 5 percent of investment by one issuer

No limit on Gov or public securities

Can only borrow up to 10 percent of nav

No over concentration

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ETFs

Traded on stock exchange and mirror the price movements of the underlying index, sector or commodity

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Positives of etfs

Greater diversification
Lower costs
Increase transparency
Greater liquidity

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Negatives of etf

Easily lure people into asset class that they are unsure about
Leveraged instruments not understood by investors
Different costs involved in ETFs

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Who can create and redeem new shares for etf

Authorised participants

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How are shares created by authorised participants

Uses the creation list as proposed by the etf manager

AP then goes into market and buys components of list in correct proportion

Ap then gives these to etf manager in exchange for etf shares which are then sold on market

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What are transactions between AP and etf manager known as

Creation units and often in blocks of 50000 shares

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Factors that affect the bid ask price and nav of etf

Cost of buying and selling securities

Vol of prices

Liquidity of markets

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Synthetic ETFs

No need to buy index underlying, instead bank commits to paying returns on an index through use of derivative contracts

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Exchange traded commodity

Is an exchange traded note that tracks individual commodities or board commodity indices

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What is an exchange traded note

Senior unsubordinated debt instrument issued by a single bank and listed on exchange

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How are etc and etn work

Issued off balance sheet Etns collaterised with Gov bonds or blue chip stocks that are ring fenced

What do Investment trust companies offer and what type of company are they

Offers both corporate and private individuals a way to purchase diversified portfolio of securities They are LLCs

Characteristic of investment trust company

Closed ended Raise more capital by rights issue or borrowing

Investment trust companies fees

1.2 percent of the value of fund each year

What does the ongoing charges figure include

Annual management charge Admin services

What does the ongoing charges figure not include

Performance fees Trading costs

What rule has focused attention of charges on investment products

Mifid II

Total cost of investing in fund includes 3 things

Ongoing charges figure Transaction costs Any one off charges Perf fees

What is a structured product

Well defined objectives in terms or irks and return

3 main types of structured product

Structured deposits Structured capital Structured capital at risk

What are structured deposits

Fixed term deposit account with the interest being determined by the performance of the underlying asset

What is structured capital

Similar to structured deposits but do not offer the guarantee of the insured capital if provider defaults

What is structured capital at risk

Full investment capital at risk if certain levels of the underlying are breached at certain points in a period

Key periods for structured products

One to two month offer period Strike date

What are structured projects subject to

Capital gains tax

What are barrier levels

Key index levels below which the index must not fall

What do platforms do

Simplify and consolidate the investment process for investors

A generic term for investment account held on platform is a …

Wrap account

Fund supermarket?

Type of electronic platform that facilitates purchase sale and management of collective funds online

What is the NS&I

State owned saving bank of HM treasury and aims to attract individual saving funds in the uk to help gov funding needs

What is life assurance

Mix of life insurnace and long term savings

In exchange for a premium what can purchases of life assurance buy

Whole life policy which pays out lump sum at time of death Endowment policy which pays out at end of specified period

What is defined contribution scheme

Contributions are fixed and benefits depend on performance of the fund, at retirement, accumulated savings paid out in annuity

What is longevity risk

Flexible withdrawing from defined contribution fund could result in pensioner running out of money

What is a defined benefit fund

Employers garentee benefits to pensioners based on final salary and years of contribution;

What is a wrap account

Single fee covers all costs.p charged to the account

Key thoughts when thinking about liquidity

Does illiquidity risk provide greater returns Can portfolio access liquidity in case investors withdraw Can underlying investments support liquidity demands

Why have high liquidity

Redemption requests met To be able to provide collateral or margin quickly To act on market dislocations quickly

What can be used to gain liquid exposure to illiquid assets

Derivatives

When does liquidity for derivatives improve

Stressed market conditions, increased demand for liquid market hedges

What is a gate

Slows down pace of redemptions

What type of class is not a share for a split capital trust

Foreign income shares

What is single pricing

Investor pays none of dealing costs Buyers match seller when selling and buying

What is dual pricing

Consumers buy at offer price and sell at bid price Offer price > bid price

What 3 classes are a share of split capital trust

Capital shares Zero dividend preference shares Income shares

What is a split capital trust

is a type of investment trust which issues different classes of share to give the investor a choice of shares to match their needs.