Chapter 8 - Asset Classes Flashcards Preview

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Flashcards in Chapter 8 - Asset Classes Deck (19):
1

Cash

Security
Deposits
Banks, building societies, etc, NSI
Regular Interest
Liquid

2

Types of Cash

Foreign Currency Deposits

Offshore Sterling Accounts

NS&I
Certificates...no new investments. Free of tax
65+ Guaranteed Growth Bonds - fixed term
Guaranteed Growth Bonds - Over 65s, fixed terms.
Income Bonds - Gross monthly income, variable rates.
Premium Bonds - max now £50k.

Peer to Peer Lending - Crowdfunding.
Rates can be attractive.
Still a default risk.
Not covered by protection scheme.

3

Risk of cash

Credit risk
Interest rate risk
Inflation risk
Returns, depends on base rate. Last 10 years -0.5%.

4

Fixed Income Asset Class

Bonds, govt or companies. To raise money. Loans.

Bonds are:-
Negotiable
Fixed Term
Long term
Debt instrument


5

UK Trend for Bonds

Companies go to bond market for loans, not banks.
Interest rate is the coupon
Repaid after fixed period

Title always has name, coupon and maturity date.

Traded by nominal value
Prices are mid market

Interest paid twice per year. Cum or ex dividend
Cum is with dividend - purchaser receives full 6 months interest.
Ex is when 6 months interest is paid to seller.

6

Markets

Primary and secondary (traded after bought)
London is world centre.

7

Bond Yields

Interest Yield and Redemption yield

Interest yield is flat or running yield or income yield. Different to coupon and is
Coupon divided by clean price x 100.
Can be misleading. NB. Tax rate too!

Redemption yield more accurate.
Takes into account both income payments and capital gains or losses. Complicated, available in pinks.

Capital gains on bonds mostly tax free. If held as part of OEIC or UT, gains on OEIC are subject to CGT.

8

Risks of Bonds

Interest Rate
Liquidity
Inflation
Currency
Default

Int rates rise, bonds fall and vice versa.

Specific commercial risks or market risks

Security...govt most secure, but some governments weaker.

Creditworthiness is importants...grades of Bonds
High grade, AAA or Aaa
Low or junk, CCC or Caa
Default D or C
Gradings different per agency... Standard and Poor's or Moody's.

Investment grade or non-investment grade, e.g. junk.

Economic factors can impact, e.g. change in monetary policy.

Volatility... low coupon is more volatile. Longer period is more volatile.

Gilts are risk free, guaranteed by UK government.

Index linked gilts in line with inflation.

Corporate bonds riskier than gilts. Grades, volatility, prices.

9

Equities

Prices affected by:-

External economic and political
Investor sentiment
Profit expectations
Dividend expectations
Takeover activity
Track record or company management

10

Listings

Main market or AIM
AIM for small companies to help young and developing companies.

Cost of buying and selling:-
Commission - on both purchases and sales
Stamp duty - govt taxes paid by purchaser, multiples of £5. Abolished on AIM shares.
Panel on takeovers and mergers levy, PTM - flat rate of £1 for regulatory body.

11

Types of shares

Ordinary - bulk of companies shares, confer ownership stake in company.

Preference - pay dividend twice yearly. Preferential to ordinary shares. Ranked in certain order.

12

Performance

ten years to 2011 - worst performance since 70's. Real return of 1.2%.

Evaluation of performance
FTSE Group. benchmark
Constituent weightings reflect free float of shares
Main indices are:-
All Share (FTSE 100 + FTSE 250 + further 300 companies), Small Cap...98% of LSE.
FTSE 100 - 81% of total UK market capitalisation.

Others:-
FTSE 350 - combines 100 and 250.
FTSE Small Cap - under top 350
FTSE Fledgling - listed but too small for All Share.
FTSE AIM - young and growing companies
FTSE techMARK 100 - top 100.
FTSE4Good - globally recognised corporate social responsibility standards.
FTSE AIM UK 50 Index - 50 largest AIM


Overseas
USA - Dow Jones, S&P Composite, NASDAQ
Japan - Nikkei 225, Topix
Germany - DAX 30
France - CAC 40
Hong Kong - Hang Seng
Australia - S&P All Ordinaries
South Africa - FTSE/JSE All-Share
Spain - IGBM
Europe - FTSE Eurofirst 300

World Indices
MSCI Global
FTSE All-World Index

13

Property

Asset backed, unlike others.
Commercial property follows business profitability.
Different to residential.

Main types:-
Residential as buy to let
Commercial in SIPP
Commercial as part of collective

14

Residential

Since 1983, up by 6% per year on average.

Drawbacks.... Liquidity, Diversity, Management issues. (letting), Void periods.

Choosing a Buy To Let:-
Tenure - Assured short hold is best.
Prospect for capital growth
Expected yield - vary.

15

Commercial Property

Retail- lowest yielding
Office Buildings
Industrial Properties- highest yielding

16

Alternative Investments

Works of art, collectibles
Not income producing, good for HRT.
Some exempt from CGT
Difficult to value
Cost of keeping them
Value dependant on supply and demand
Fakes can flood markets
Rises in line with inflation in general

Is it really viable?
Dealer mark-ups.
State of repair
Quality
Tastes can change

Not enough buyers and sellers
Difficult to diversify

17

Commodities

Hard - gold, silver, oil, gas.
Soft - Coffee, cocoa, sugar, corn, wheat, livestock.

Good..lack of correlation with other assets,
Risky..prices driven by big companies, political risks.

18

Hedge Funds

One or more alternative investments strategic against conventional to achieve better return.
Absolute returns - can achieve positive growth when markets falling
Low correlation with markets
Low volatility - dependent on approach by manager.
Diversification - several strategies within one fund.

Can be illiquid in terms of notice periods before funds are returned to investors
Some managers can defer payment
Often offshore, low levels of protection for investor.
Leveraging. Highly leveraged fund can have higher volatility.
Counterparts risk - they may not meet obligations
Currency - depends where re exchange rate movements
Transparency - complex, manager can change strategy. Difficult to assess.
Expense - high charges.

They are Unregulated Collective Investment Schemes.
SJP - they are for Professional Clients only.

19

Business Cycles

Now last 10 years.

Recovery then expansion of economic growth
Boom
Deceleration and slowdown of contraction
Recession

Measured by GDP... if decline in 2 successive quarters, said tone in decline.