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1
Q

Strategic Asset Allocation

A
  1. Decide what proportion of of portfolio in broad asset classes taking into account
    Risk
    Market conditions
    Diversification
    Liquidity
    Investment time horizon
    -Then follow top down
    Works based on EMH and is for long term investing.
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2
Q

Tactical asset allocation

A

Also known as market timing.
Allows investment manager to move range of each asset classes depending on market
E.g
Cash 10-20%
Bonds 10-40%
Equities 45-75%
Total 100%

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3
Q

Bull or Bear market

A

Bull - Investors/market as a whole are positive
Bear “ “ “ negative

E.g.
Fixed income - if investment manager bullish… take longer duration bonds

Equities - bull increase exposure to higher beta stock

Derivatives-
Bull - buy call options or go long
Bear - buy puts or go short

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4
Q

Business cycle names and characteristics

A

Recovery/acceleration - sluggish output, weak profits, interest rates and inflation falling

Boom - fast growth, inflation rises & interest rates increase to dampen demand

Slowdown - growth slows, inflation high, central banks reluctant to cut rates. Sales drop & unemployment rises

Recession - output sluggish, weak profits. Inflation & interest rates falling.
Recession is 2 quarters of negative inflation.
Depression sometimes happens when trough low and high level of business failure

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5
Q

Types of inflation (3 main types)

A

3 main types

Demand pull - companies charge more because they can as people have more spare money.

Cost pull - low supply of goods, companies charge more as they have less to sell but still need to make a profit.

Built in - caused by expectation. Employees see prices rise,
they ask for pay rises
Companies have to put prices up

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6
Q

Types of risk

A

Volatility
Capital/credit risk - (default, downgrade, credit spread, counter party & Bail-in)
Liquidity risk
Event risk
Interest rate risk
Gearing risk
Inflation risk
Currency risk
Shortfall risk
Systemic/non-systemic risk
Market risk
Political risk
Regulatory risk
Concentration
Style (e.g. Value out of favour)
Manager
Default risk
Valuation risk

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7
Q

Bond duration and how it moves with changes in interest rate

A

Bonds have an inverse relationship with interest rates. The duration measures how sensitive the bond is.
If a bond has a duration of 5 and interest rates go up by 1% the bond would go down by 5%.

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8
Q

Top down investment order

A

Asset allocation
Sector selection
Stock selection

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9
Q

Stochastic Modelling (Monte Carlo Simulation)

A

Asset allocation based economic model.

Predicts probable outcomes for different investments.

Major cause of 07/08 financial crisis as practitioners used overly optimistic assumptions

Should be reviewed quarterly

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10
Q

Friendly Society contributions & tax treatment

A

£300 if paid monthly (or more frequently that annually e.g quarterly)
Annual max £270 pa

Tax
Interest dividends and capital gains tax free in the fund and investment growth tax free

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11
Q

EIS, VCT & SEIS

A

[IT relief]. EIS. VCT. SEIS
Max inv £2,m* £200k £200k
relief 30% 30% 50%
Holding 3y 5y 3y
1yr bck? Y. N Y
Tax div? Y. N. Y
CGT gains 3y. Y. 3y. CGT def Y N (50%)
Business PR. 2yr N. 2yr

*Knowledge intense

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12
Q

Benefits of GIA over bond

A

Wider range of investments
No underlying tax
Gains CGT (lower rate)
Uses CGT annual exemption
CGT rebalances on death
Bed & ISA available
Simple

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13
Q

Value investing

A
  • Bottom up
  • FUNDAMENTAL ANALYSIS to identify undervalued stock
  • Contrarian view - considers out of favour
  • Places emphasis on dividends and high div cover
  • Focus on low P/E or PEG
  • Assumes market not efficient
  • Assumes prices will correct over time
    Long term approach
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14
Q

Growth investing

A
  • Bottom up
    -Tries to identify stock with potential for above average growth
  • Ignores valuation/fund analysis
  • High P/E or PEG
  • lower reliance on dividends & div cover
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15
Q

What is Regression Analysis

A

Regression analysis is a set of statistical methods used for the estimation of relationships between a dependent variable and one or more independent variables

It plots a straight line through a scatter chart

Can predict impact of economic changes or establish beta in multi factor

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16
Q

Features of NS & I income bond

A

Paid gross monthly
Taxes as savings income (PSA)
Investment, min £500 - max £1,000,000
Can invest jointly (max is per person)
Instant access (penalty free)
Can’t accumulate
Interest variable

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17
Q

Green savings bond

A

Locked in for 3 years
Interest rolled up and paid in final year
Fixed rate
Lower interest than income bond
Invest between £100 - £100,000

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18
Q

Difference between Managed Portfolio Service (MPS) & Fund of Funds (FoF)

A

FoF 1 fund & MPS collection
FoF trades within fund, MPS as investor
FoF no CGT on trades
FoF investor can control CGT on encashment & MPS CGT on each trade

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19
Q

3 main types of benchmark

A

Constraint - Used to limit the construction of the portfolio

Target - Used to match/exceed performance

Comparator - compare performance/risk

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20
Q

Difference between AIM admission & UK main market

A

Aim no min capitalisation, main £30 m
AIM no min earnings, main 3yrs revenue record
AIM no min free float - main 10%
AIM no admission docs - main market prospectus
AIM nominated advisor- main, listing sponsor

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21
Q

GARRP

A

Lower P/E /PEG ratio than growth
Pays only fair price
A mix of value & growth investing

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22
Q

REIT

A

UK resident
Close ended

Property rental ring fenced at least 75% of total profit and total value of assets

Interest on borrowing covered 125% by rent

Distribute 90% of exempt profits within 12m

Property income distribution (PID)
Paid net 20% tax
PSA not available

Dividend paid gross

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23
Q

Things that can change a companies share price other than the market

A

Economic outlook
Political/tax/regulation changes
Investor sentiment
Supply & demand
Credit rating
Takeover activity
Profit/earning expectations
Capital event
Dividend expectations
Change of management
Competitors
Fraud
Inclusion or removal from index

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24
Q

Types of preference share and characteristic

Study These Flashcards
A

Cumulative - Has right to unpaid dividends (arrears) carried over

Participating - Additional dividend linked to company profit

Redeemable - Repayable by the company

Convertible - Convertible to ordinary shares on pre-set terms

25
Diversification rules (UCITS) OEIC
16 Holdings minimum Maximum 10% in up to 4 companies Other companies max 5% Maximum unlisted 10%
26
Inverted Yield Curve Reason
Expectations that; - long term interest rates will fall - but short term interest rates will rise - Economic outlook poor, possible recession - Costs more for long term bonds than short term
27
Flat Yield Curve Reason
Market Uncertainty Economic Slowdown Expectations Central Bank Policy (actively raising interest) Strong Demand for Long-Term Bonds Low Inflation Expectations
28
Normal Yield Curve
Long term rates are higher due bonds that have a longer term are more exposed to the uncertainty that interest rates or inflation could rise at some point in the future
29
Ways to track a benchmark
Full replication - buy stock that fully replicates the benchmark (higher cost in trading) Stratified Sampling - Buy sample of the index's constituents Optimisation - Uses a computer model/algorithm to produce sample of stock Synthetic - Uses derivatives
30
Benefits of Gilt fund over direct held
Active management Diversification Mixture of duration's and maturities across yield curve Can invest in new gilts at issue Access to market participants
31
Drawbacks of gilt based fund over direct
Exposure to duration risk Loss of known redemption date Investor protection limited to £85,000 Subject to CGT Daily dealing Fund charges
32
Types of Money Market Funds
Short-Term Money Market Fund Invested in short term debt & money market instruments. - Weighted average maturity of no more than 60 days - Weighted average life of no more than 120 days. Standard Money Market Fund Looking for slightly higher return therefore looks to invest in assets with - Up to 6 month maturity - Between 6-12 months.
33
Types of bonus on With-Profits Policy
Annual/Reversionary - Regular payment - Variable amount - Once applied can't be removed Terminal/Final - One-Off - Paid at Maturity or death or Surrender/Redemption - NOT GUARANTEED
34
Difference between Conventional and Variable unitised with-profits funds
UWP - has units UWP bonus in advance, CWP bonus in arrears UWP bonus can be change, CWP can't UWP bonus applied to unit price CWP bonus applied to sum assured UWP easier to switch UWP easier to calculate current value as its more transparent
35
Info required when applying for additional permitted subscription
Ni Number DOB proof (birth certificate) Death certificate Marriage certificate Full name & address
36
IFISA
Crowd funded debentures Cash Peer to peer Sharia/alternative finance
37
Three main ways stock market index are weighted
Market capitalisation Price Equal/unweighted
38
FSCS per investment type & when amount changed
Investments £85,000 per firm. No protection on individual shares Pension 100% no upper limit SIPP £85,000 Compulsory insurance 100% no upper limit Non Compulsory insurance 90% no upper limit Before 1st April 2019 - £50,000
39
Ways to mitigate sequencing risk
Reduce level of initial withdrawal Secure income through annuity Take natural income/dividends Increase cash holdings Invest in fixed interest Reduce risk/increase diversification Retire later Change frequency of withdrawals
40
Main features to consider when looking at DIM
Charges Overlap with existing non-DIM assets Regulatory permissions/Reputation/Financial Strength Past performance Investment style/strategy ATR Conflict of interest Basis of agreement
41
Main features of MPS
Collective based Low min investment CIP/investment committee Changes can result in CGT Range of portfolios based on risk Not bespoke Low cost
42
Behavioural Finance common
Over confidence - Believe own research best. E.g believes can time market Misunderstanding of probability- Too focused on yield at expense of potential risk to capital Anchoring - fixated on a trait, headline 9% return Loss aversion - people generally react more to loss than the same percentage gain Regret - hold onto an asset feeling it will come back Herding - Fear of missing out, follows the crowd. Greater fool theory Endowment effect - Greater value as already owned, emotional attachment & fear of selling Mental Accounting - Compartmentalising each asset/not looking at overall position
43
Options available at the end of a Index-linked Savings Certificates
- renew your Certificate for another term of the same length - renew it for a term of a different length (only 3-year and 5-year terms available) - cash it in ***Not open to additional investment, no new money***
44
How to calculate the maturity value on Index-linked Savings Certificates
Original value + Interest + Inflation (CPI)
45
Main functions of ACD in OEIC
- Compliance and regulatory reporting - Responsible for pricing/valuations - Appoints & oversees manager - Buys & sells shares - Maintains shareholder register - Maintains liquidity/imposes Dilution levy - Prepares accounts
46
Main functions of Depository in OEIC
- Acts as custodian - Safeguards assets - Collects/pays income distributions - Monitors ACD on investments & borrowing limits - Deals with any wind up fund
47
Difference between FoF & Manager of Managers
Feature (FoF) (MoM) Style. Invst ex funds. Hires ex man Control Less More Fees. Higher (dbl layers) typ lower Transparency Lower Higher Users Retail & hedge Institu&pens
48
PAIF Qualification Criteria
Be an OEIC – A UK tax-resident Open-Ended Investment Company, not a close company. Have a Property Focus – At least 60% of net income must come from property investment. At least 60% of assets in property. Meet Distribution Rules – Must distribute 100% of tax-exempt property income, separating: - Property income (PID) - withholds 20% - Interest income paid gross PSA - Dividend gross Not a close company; at least 60% of investors must be qualifying investors (e.g., pension funds). No corporate investor holding more than 10% of net assets Be Tax Transparent – Exempt from corporation tax on property income; tax applies at the investor level.
49
Volatility Managed Fund definition
A Volatility Managed Fund is an investment fund designed to control and reduce fluctuations in value by actively managing risk. These funds aim to smooth returns by adjusting asset allocation based on market conditions, often using strategies such as: Diversification – Investing across asset classes (equities, bonds, alternatives) to spread risk. Dynamic Asset Allocation – Adjusting the mix of assets in response to market volatility. Risk Targeting – Keeping overall portfolio risk within a defined range, often measured by standard deviation or value-at-risk (VaR). Use of Derivatives – Some funds use options, futures, or other derivatives to hedge against market swings.
50
Difference between interim and final dividend
Interim Dividend: Paid mid-year, before financial year-end. Approved by the board of directors. Based on estimated profits. Can be revoked before payment. Generally smaller in amount. Final Dividend: Paid after the financial year ends. Requires shareholder approval at AGM. Based on audited financial statements. Cannot be revoked once declared. Typically larger in amount.
51
Contango & Backwardation & roll yield
Contango: Futures price is higher than the expected future spot price, often due to storage or carrying costs. Backwardation: Futures price is lower than the expected future spot price, usually due to high demand or shortages. Roll yield is the return from rolling futures contracts as they near expiration. It’s positive in backwardation (futures price below spot, gaining value) and negative in contango (futures price above spot, losing value). Common in commodities and futures-based investing.
52
Charges when buying shares - Paperless via CREST - Paper via stock transfer form - EFT
CREST 0.5% Stamp duty (SDRT) PTM levy £1.50 (over £10,000) Paper 0.5% Stamp duty (no fee if less than £1,000) - Rounded up to nearest £5 ETF no SDRT or PTM Other fees, broker fees, dealing fees
53
Investment Association (IA) benchmarks for fixed interest
Sterling Corporate Bond Sterling Strategic Bond Sterling Yield
54
Considerations with platform change
Ownership of tech provider/conflict of interest/financial stability Ability to meet clients needs/expectations Timescale of upgrade/testing/phasing Business continuity plan Front/back office compatibility/ tools/reporting Impact on proposition Time/cost to firm
55
Risks to client during migration of platform
Loss of service/outage Loss of income payments unable to trade/out of market Data breach Loss of transaction history Increase in cost
56
Factors that could impact holding assets on platform
Asset not available/eligible to retail clients Dealing infrequent/unable to sell Additional costs May have to trade manually May not report automatically/manual input
57
Main Asset headings on balance sheet
Non-Current (Fixed) - Tangible (machinery, factories) - Intangible (good will) - Investments Current - Cash - Stock - Trade debtors
58

AF4/J10 (4 decks)

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