Chapter 7 - Investment Funds

Question 1

What are the advantages of collective investments? (Pooling money)

Answer 1

1) Economies of scale2) diversification3) access to professional investment management4) access to geographical markets, asset classes or professional investment strategies5) regulatory oversight6) tax deferrals

Question 2

What are the 3 types of investment styles?

Answer 2

1) active management 2) passive management 3) core-satellite management (mixture of both of the above)

Question 3

What are UCITS and NURS?

Answer 3

UCITS: ‘Undertaking for Collective Investment in Transferable Securities’. A UCITS fund therefore complies with the requirement of the EU directives - they can be marketed and sold throughout Europe.NURS (non-UCITS-Retail-Scheme) are funds that are suitable for retail investors but do not meet the EU UCITS directive.

Question 4

What is a unit trust? What are all the roles in a trust? Are the open or closed?

Answer 4

A collective investment scheme in the form of a trustLegal owner of the assets, overlook the manager : trustee Beneficial owners : unitholdersManage the fund and provides daily pricing of the units based on the NAV : unit trust managerThese are open ended because the trust can grow as investors buy in and sell

Question 5

What is a OEIC known as by the regulators? What are they known as in Western Europe? What are the roles within an OEIC? Are the open or closed?

Answer 5

OEICs (open ended investment companies) are companies (not trusts), they are known as ICVCs (investment companies with variable capital) to the regulators and SICAV in Western Europe (typically in Luxembourg).They are companies (but not formed under the Companies Act instead by special legislation), investors by shares in the company, the ACD (authorised corporate director) run the day to management of the investments, and the investments are held by the depository (overlook ACDs activities)The are open

Question 6

What’s the difference between unit trusts and OEICs?

Answer 6

1) Units trusts are trust, OEICs are companies.2) investors by units in unit trusts and shares in OEICs3) the trustee is the legal owner of the assets in a unit trust, whereas the depository hold the investments - both provide oversight of the managers 4) the investments are run by unit trust managers but ACDs (authorised corporate directors) in OEICs. 5) units are bought daily from unit trust directors and OEICs shares are bought from the ACD - not a secondary market.

Question 7

Before investing what are the key considerations an individual should make?

Answer 7

What am I investing for?What money do I need and when?What risks/asset class balance do I want to take?

Question 8

How are unit trusts and OEICs priced?

Answer 8

Either single pricing (mid-market value) or dual pricing (bid and offer price).Normally unit trusts are dualNormally OEICs are single

Question 9

How are shares in OEICs and units in Unit trusts bought?

Answer 9

Either1) direct with the fund manager 2) via the broker or IFA3) fund supermarket

Question 10

How are OEICs and unit trusts settled?

Answer 10

Once money is received and invested, the fund group will record ownership in the fund’s share register.If selling the manger has 4 days to settle the sale

Question 11

What is a investment trust? Are the open or closed?

Answer 11

These are companies not trusts - directors and shareholders. These are closed (the number of shares remain fixed for a period of years)

Question 12

What is the attitude to gearing in unit trusts, investment trusts and OEICs?

Answer 12

Forbidden except in investment trusts. They can borrow money and invest it.

Question 13

What are REITs and their uses?

Answer 13

Real Estate Investment TrustsCompanies that invest in property without the previous disadvantage of double taxation.They can be held in NISAs and SIPPs (self-invested pension schemes)They are quoted on the LSE.

Question 14

What is a ETF? Are the open or closed?

Answer 14

These are open ended. They trade at a premium or discount but the difference in minimal.Return is in the form of dividends and capital gains.No stamp duty is payable

Question 15

What are the 5 mains types of investment fund?

Answer 15

Authorised unit trusts OEICsInvestment trusts ETFHedge funds

Question 16

What are the legal structure and management/ supervision/ regulation of the 4 main investment funds? Are the open or closed?(Excluding hedge funds)

Answer 16

Authorised unit trusts (trusts, managed by an authorised manager, which is supervised by the trustee and regulated by the FCA) open.OEICs (companies, managed by an ACD (authorised company director), which is supervised by the depository and regulated by the FCA) open.Investment trusts (companies, managed and supervised by the board of directors, and regulated by the UK listing authority as they are shared on the LSE) closedETF (company, managed by the management company, which is supervised by the depository and regulated by the FCA and the UKLA as the are shares on the LSE)

Question 17

How are the 4 main investment funds priced, traded and settled? (Excluding hedge funds)

Answer 17

Unit trusts - single or dual priced from the manager and is settled by the managerOEICs - single of dual priced from the corporate director and is settled by the corporate directors Investment trusts - supply and demand from the stock market and settled by CREST ETFs - based in NAV from the stock market and is settled by CREST.

Question 18

What are absolute return hedge funds? How can retail investors invest in them and what are their common aspects?

Answer 18

Absolute return: profit regardless of general movement (include derivates and take long and short positions)Normally high buy ins and restricted entry but most can get into them from fund-of-hedge funds.Common aspects:1) structure: unauthorised and unregulated (i.e. Not marketed to private individuals)2) high investment entry: more than £50k up to £1m3) investment flexibility 4) gearing5) prime broker - safekeeping off assets, buy and sell from6) liquidity - lock in periods7) cost - performance fees if certain levels are achieved can be huge.