Chapter 7: Investment Funds Flashcards
(36 cards)
Two ways to invest into an asset class:
- Direct investment - individual personally buys shares in a company
- Indirect investment - individual buys a stake in an investment fund, and invests in the shares of a range of different types of companies.
What are collective investment schemes and what are the benefits?
Pool the resources of a large number of investors. The pooling has benefits:
- Economies of scale
- Diversification
- Access to professional investment management
- Access to geographic markets
- Regulatory oversight
- Tax deferral
How is the UK Investment market split?
Sell side:
- Corportates through to exchanges, securities houses and investment banks
Buy side:
- Investment managers, consultants, pensions funds through to banks, advisers and insurance funds which ends with private investors
Active management is?
Seeks to outperform a predetermined benchmark over a specified time period.
Employs technical analysis to assist in the forecasting of future events which are specific to a company.
Actively managed funds have higher charges than passive funds.
- Top down:
Manager focuses on economic and industry trends - Bottom up:
Analysis of a company’s net assets, future profitability and cash flow
Features of bottom up approach in active management are?
- Growth investing - picking shares of companies that present opportunities to grow
- Value investing - which is picking the shares of companies that are undervalued relative to their present and future profits/cash flows
- Momentum investing - picking shares whose share price is rising on the basis that this rise will continue
- Contrarian investing - picking shares that are out of favour and have ‘hidden’ value
What is passive management?
Constructing a portfolio that tracks or mimics the performance of a recognised index.
Advantages of indexation:
- Less expensive to run than active portfolios
- Funds charges will be lower than active mgmt funds
Disadvantages of indexation:
- Doesn’t meet all of an investors objectives
- Indexed portfolios follow the index down in bear markets
Combining active and passive mgmt…
Known as core-satellite management.
70-80% of portfolio gets indexed to minimise risk of underperforming. Rest of portfolio gets fine tuned by investing into individual securities or specialist funds - satellite part.
What are UCITS?
Series of EU regulations that were designed to facilitate the promotion of funds to retail investors across EU.
The aim was to create a framework for cross-border sales of investment funds throughout the EU, which would allow an investment fund to be sold throughout the EU.
The rationale was that allowing funds to be sold across borders would reduce costs involved and improve customer choice, while ensuring a level playing field through common standards of investor protection.
Must provide an ongoing charges figure (OCF) and quote this in key investor information document (KIID).
What is NURS?
Funds can also be set up under NURS regulations. NURS stands for ‘non-UCIT retail schemes’ and these are funds that are deemed by the UK regulator to be suitable for retail investors, but do not meet the more prescriptive rules of the European UCITS directive.
What is a unit trust?
Is a CIS in the form of a trust in which the trustee is the legal owner of the underlying assets and the unit holders are the beneficial owners. Can be authorised or unauthorised.
What do investors do with a unit trust?
Investors pay money into the trust in exchange for units. Money is invested in a diversified portfolio of assets. If portfolio increases in value, value of units will increase. Opposite works too.
Role of unit trust manager
Decide, within the rules of the trust and the various regulations, which investments are included within the unit trust to meet its investment objectives.
Manager also provides a market for the units, by dealing with investors who want to buy or sell units.
Legal structure of unit trusts
Every unit trust must appoint a trustee. This person is the legal owner of the assets in the trust.
Trustee also protects the interests of the investors by monitoring actions of unit trust manager.
What is an ‘open ended investment company’ (OEIC)?
Another form of authorised CIS. They are referred to as ‘investment companies with variable capital’ (ICVCs) by the FCA.
An ICVC commonly found in Europe is the ‘Societe d’investissement a capital variable’ (SICAV). They are set up in Luxembourg by AM firms.
OEIC is a CIS structured as a company, with investors holding shares.
How does OEIC work?
Invests shareholders money in a diversified pool of investments.
OEICs are companies but they are established under special legislation and not the companies act. They are not subject to share repurchase restrictions, create new shares and redeem existing ones.
What happens when an OEIC is set up?
It’s a requirement that an ‘authorised corporate director’ (ACD) and a depository are appointed.
ACD = manages investments
How are prices of OEICs sorted?
Single priced - use of mid market prices of the underlying assets to produce a single price. Does not involve the ability to recoup dealing expenses and commissions. Such costs are recouped either by applying a separate charge known as a DILUTION LEVY. Initial charge will be charged separately.
Dual priced - using markets bid and offer prices of the underlying assets to produce separate prices for buying and selling of shares/units in the fund
Charges in funds:
- Initial charge
- Annual management charge (AMC)
- Audit costs
- Commission
- Legal fees
- Fees for advice
What charges does UCIT face?
Ongoing charges figure (OCF) - costs of UCIT management company, depositary, custodian, investment advisor, reg fees, audit fees, payments.
What’s a fund supermarket/platform?
Specialises in offering investors easy access to a range of unit trusts and OEICs from different providers. They offer online dealing, valuations, portfolio planning tools and access to key features documents and illustrations.
How does settlement take place ?
With each fund group. Once investment has been made and the amount invested has been received, the fund group will record ownership of the relevant number of units or shares in the funds share register.
When investor decides to sell, they need to instruct fund manager who then has four days from receipt of the instruction and settle the sale and remit the proceeds to the investor.
One widely used system is EMX.
What’s an investment trust?
A company. Has directors and shareholders. Uses a diversified portfolio.
