Learning Material Sample
Investment principles and risk7.1 Indirect investment products: Part 1Learning outcome 6 Analyse the characteristics, inherent risks, behaviours and relevant tax considerations of investment products
Direct investment was covered in Chapters 1 and 2, when we considered the diff...
Shortened demo course. See details at foot of page. ...ll be of most benefit to those learning about this area for the first time: Collective or packaged investment products allow small investors to participate in a large portfolio of securities or other assets with many other investors. They offer the following advantages:
They offer a good way for small sums of money to be invested as funds are pooled with other investors i... Shortened demo course. See details at foot of page. ... that fund values are linked to the value of the underlying investments. For some packaged products such as Investment Trusts and with profit bonds, the link to underlying assets is not so direct.Why are collective funds useful for investing small sums of money? Answer : Purchase course for answer PART 1 - Characteristics of Unit Trusts & OEICs
Unit Trusts and OEICs are open ended collective investments often referred to as 'funds'. They have the following general characteristics: They are pooled funds of investors money which are used to buy a range of different assets and investments They are open-ended which means that the size of each fund can vary according to supply and demand. Units or shares can be created or issued when investors invest and can be cancelled by selling them back to the fund manager when an investor wishes to dispose of their holding Investors buy units or shares in the investment which are a small but equal fraction of a large portfolio The assets of a Unit Trust are held by trustees and are invested by fund managers The assets of an OEIC are held by an independent depositary There is generally an initial charge to cover setting up costs and an annual management charge to cover the cost of managing the underlying assets. Where a fund does not have an initial charge, an exit charge may apply There are many different types of funds from general funds which cover a wide range of markets and types of security, to very specific funds that focus on a particular market, sector or type of security Sectors and categories Investment Association data shows there are around 4,000 funds on sale and to enable investors to distinguish between them, Unit Trusts and OEICs have been categorised into over 35 different sectors. Sectors are determined by the IA in consultation with its members It groups funds investing i... Shortened demo course. See details at foot of page. ...S and close substitutes (together known as NMPIs – non-mainstream pooled investments) to most retail investors. Instead, they can only be promoted to sophisticated investors and high net-worth individuals.Some investments are outside of the restrictions such as: Exchanged traded products Overseas investment companies that would be Investment Trusts if they were based in the UK REITS VCTs EISs and SEISs (unless they are structured as UCIS) Special Purpose Vehicles primarily investing in shares and bonds The following investments are subject to the marketing restrictions: Qualified investor schemes Traded life policies Units in UCIS Special Purpose Vehicles pooling investment in assets other than shares or bonds The transparency rules The aim of transparency rules are to ensure transparency of information for investors. The Alternative Investment Fund Managers Directive (AIFMD) The AIFMD is a framework for alternative investment managers designed to increase investor protection and reduce risk. AIFs are funds not regulated by the UCITS Directive and include hedge funds, private equity funds, retail investment funds, investment companies and real estate funds, amongst others. On 1 January 2021 EU law was adopted into UK law with necessary changes to reflect the UK as a non-EU country. The UK version of the AIFMD is within the Alternative Investment Fund Managers Regulation 2013, with modifications. What is the benefit of a fund becoming authorised as a UCITS scheme? Answer : Purchase course for answer PART 2 - Characteristics of Unit Trusts & OEICs
Investment powers and restrictions FCA rules restrict the investment powers of authorised funds, to ensure that each fund has an appropriate spread of investments and to ensure liquidity, i.e. that funds are redeemable on demand. COLL (Collective Investment Schemes Specialist Sourcebook) sets out the rules for establishing and operating authorised schemes in the UK This includes the markets and type of securities in which the funds can invest Securities must be freely transferable, without any restriction or requiring permission The trust deed contains a statement that the fund must invest according to the FCA regulations. No other investment statement is required unless the fund is to have narrower investment powers than those allowed through regulation Det... Shortened demo course. See details at foot of page. ...to 10% in unapproved securities, and up to 20% of the units of another collectiveUK non-UCITS can hold up to 20% in unapproved securities and unregulated schemes, and up to 35% in the units of another collective (and such schemes must satisfy the same authorised criteria as the scheme making the investment) UK UCITS and UK non-UCITS schemes can hold warrants without limit Apart from money market funds, Unit Trusts hold cash for cashflow and liquidity purposes only, apart from during the initial offer period when they can hold cash without limit. In practice IA sector rules prevent funds from holding more than 20% in cash A fund which broadly invests in securities, which is not a tracker fund, is prohibited from holding more than what maximum % of its total value in any one company? Answer : Purchase course for answer Borrowing
Funds that borrow money to invest present a much higher risk than those that do not. It is therefore important to understand the regulatory limits placed on different types of fund and the nature of borrowing allowed. A retail UK UCITS scheme is not permitted to borrow money for investment (‘gearing’) on a permanent basis. It is permitted to borrow up to 10% of the fund&r... Shortened demo course. See details at foot of page. ...esThe wide spread of shares within a portfolio should protect an investor against the failure of one particular shareholding Conversely, the spread of investments would also dilute participation in the success of a particular shareholding. What type of scheme is allowed to borrow up to 10% of the fund value on a temporary basis against future cashflow? Answer : Purchase course for answer PART 1 UNIT TRUSTS
The FCA defines the roles of the Unit Trust managers and the trustee: The trustees’ primary objective is to look after or protect the investors. This protection is provided by a legally binding trust deed made between the managers and the trustees. The trustee holds the assets of the fund on behalf of the unitholders, and has legal ownership of the assets The manager looks after the day-to-day running of the fund, which includes promotion, administration and investment decisions. Investment management and administration can be delegated to a third party provider, but the manager has overall responsibility for compliance with FCA regulations The manager has to be authorised to conduct investment business in the UK an... Shortened demo course. See details at foot of page. ...should manage the assets of the trust in accordance with the regulations, the trust deed and scheme particularsProvide information to the trustee as requested Maintain a record of the number of units in the fund, for inspection by the trustee Notify the trustee andthe FCA if any rules in running the trust have been breached The manager is also responsible for promotion, advertising, selecting investments and fund administration of the trust; although some of these duties can be delegated to a third party, the manager retains the overall responsibility for compliance. In the case of a unit trust, who has overall responsibility for establishment and maintenance of the register of unitholders? Answer : Purchase course for answer PART 2 UNIT TRUSTS
Certificates Previously, investors were issued with a certificate for their investment, but it has become increasingly common now for certificates not to be issued. Instead, an investor receives a periodic statement detailing the number of units they hold and the value at that time. Where issued, a certificate must include the following: The date Name of the scheme Name and address of the manager and the trustee Number and type of units held by the unit holder The name of the unit holder Registration It is the duty of the trustee to establish and maintain a register of uni... Shortened demo course. See details at foot of page. ...uch as a merger of trusts, must be approved by unitholders at a meeting held specifically for that purpose.A typical trust deed sets out the management charges and also defines the terms on which a manager can raise charges, subject to unitholders receiving appropriate prior notice of at least 60 days; If the management group operating the trust goes into liquidation, the assets of the trust (and therefore unitholders' investments) are protected by the trust structure What 3 levels of protection are available for unitholders in an authorised Unit Trust? Answer : Purchase course for answer PART 3 UNIT TRUSTS
Taxation of the fund Authorised Unit Trusts benefit from preferential tax treatment for the benefit of investors. They are subject to a modified version of the corporation tax regime, but only in relation to income. There is no CGT within the fund. Annual charges can be effectively tax relieved against UK interest and foreign income (but not against UK equity income). Different rates of tax apply depending on the composition of the investments held within the fund: Interest and rental income are subject to corporation tax at a special rate of 20% UK dividends are received as franked income and there is no further tax liability for the fund Foreign dividends may have had tax deducted at source which may not be reclaimable Funds that distribute interest rather than dividends can deduct the interest as an expense for corporation tax purposes to ensure there is no double taxation Authorised Investment Funds (AIFs) are able to apply for Tax Elected Fund (TEF) status. TEFs are required to make two types of distribution of the income they receive -dividend and non-dividend. The intention of the TEF regime is to move the point of taxation from the TEF to the investor, so t... Shortened demo course. See details at foot of page. ...utionTo pay interest, a Unit Trust must hold at least 60% of investments in interest-bearing investments, such as cash, gilts and corporate bonds. Distributions are paid gross Interest distributions count towards the personal savings allowance A basic rate taxpayer can earn up to £1,000 in savings income tax free and a higher rate taxpayer can earn £500. There is no personal savings allowance for an additional rate taxpayer Where interest distributions are paid to a discretionary trust, the trustees are liable at the trust rate of 45% on the gross distribution (interest received within the standard rate band of £1,000 will be taxed at 20%) Where the dividends and/or interest payments are re-invested back into the Unit Trust or OEIC in accumulation units, they still count as income for the investor even though the income is not paid out. The re-invested income will be subject to the same tax treatment as distributed income. Sandra is a higher rate taxpayer and has received a distribution of dividend income from her UK equity Unit Trust of £1,500. If she has already used her dividend allowance, how much tax will she have to pay? Answer : Purchase course for answer PART 4 UNIT TRUSTS
Capital gains tax Full or partial sales of units or shares of a Unit Trust or OEIC are treated as disposals for capital gains tax purposes. The chargeable gain is calculated in the usual way, as follows: The original acquisition cost less any equalisation payment is deducted from the sale proceeds Realised losses can be deducted from realised gains, and any unrelieved losses can be carried forward indefinitely Units that were held prior to 31 March 1982 are deemed to have an acquisition cost equal to the market value of the units on that date Each individual has an annua CGT exempt amount which can be set against any gains in a tax year. Spouses and civil partners have their own exempt amount Any taxable gain remaining after the exempt amount and deduction of any losses is added to the investor's other income in that tax year and is chargeable at 10% for basic rate taxpayers and 20% for higher rate taxpayers Gifts of units or shares are also treated as disposals for CGT purposes Example Craig invested £25,000 into a Unit Trust in June 1991 and has sold his entire holding for £52,673 in July 2024. His first income allocation included an equalisation payment of £25. He has his full annual CGT exempt amount remaining and has not realised any previous losses. £ Disposal proceeds 52,673 Less acquisition cost (25,000) Less equalisation payment (25) Gain on sale of Unit Trust 27,648 Less annual exempt amount (3.000) Total taxable gain 24,648 If Craig is a basic rate taxpayer, he will pay CGT at 10% on the taxable gain i.e. £2,464.80. If he is a higher rate taxpayer, he will pay CGT at 20% on the taxable gain i.e. £4,929.60. If the taxable gain when added to Craig’s other income takes him over the higher rate tax threshold, he will pay some tax at 10% and some at 20%. There was previously a practice known as ‘bed and breakfasting’, where shares were sold on one day and re-purchased the next day to realise any gains and re-base the acquisition cost. This is no longer effective and any repurchases within 30 days are ignored by HMRC as related transactions; however, there are some options still available: Units can be sold and repurchased within an ISA Units can be sold and repurchased by a spouse or civil partner Units can be sold and then reinvested in a very similar Unit Trust Transfers between spouses or civil partners are treated as no-gain/no-loss transfers for CGT. Individual savings accounts (ISAs) A unit trust can be held in an ISA, which allows the investor to benefit from the tax a... Shortened demo course. See details at foot of page. ...nce (which gives the creation price)Add on the initial charge, again express to four significant figures (0.0000) The bid offer spread is the difference between these two and is expressed as a percentage of the offer price. The maximum bid-offer spread is the aggregate of dealing costs and initial charges. This is usually in the range of circa 5 – 7% for equity funds, but will vary depending on the investment objectives of the Unit Trust. A cash fund may have no spread, where an emerging markets fund will have a much larger spread. The maximum spread permitted is calculated according to FCA rules, and is often greater than the spread operated by the fund manager. The spread will change over time, depending on market conditions: Where demand for units is high, a manager will usually sell at the full offer price of creation plus the full initial charge. This means that buyers will pay the maximum price for units and sellers should get a relatively good price for their units. This is also known as offer basis Conversely where demand is low, the offer price is set closer to the cancellation price of units. This means that buyer will receive good value, but sellers will get the minimum price for any redemptions. This is also known as the bid basis The box 'The box' is made up of both new units and units that have been repurchased by the managers from other investors. Box management is the term used to describe the stock control mechanism. The managers match the number of units in line with supply and demand and from time to time may hold units in the box if they are expecting more purchases in the short term - this reduces the costs of having to sell and repurchase underlying assets and is effectively better value for the investors already in the fund. Where a fund is expanding because investors are buying units, the manager will create units at the creation price Where the fund is contracting because there are more sellers than buyers, the manager will cancel units at the cancellation price The decision to hold units in the box is determined by assessing the risk of the market turning and unexpected future demand Valuation point As the values of the underlying investments are changing all the time, the fund itself has to be valued or revalued on a regular basis to ensure the prices offered to investors accurately reflect the value of the underlying investments. Regular valuations of Unit Trust Funds are a requirement of the FCA and most funds are valued on a daily basis, at the same time each day. What are the two components of a dual pricing system? Answer : Purchase course for answer PART 5 UNIT TRUSTS
Forward and historic pricing The fund manager of a Unit Trust can choose whether to value units on a historic or forward pricing basis. Historic pricing entails basing prices on NAV (value of underlying assets plus invested cash and any accrued net income, less charges and outstanding cash) calculated at the last valuation point The advantage is that buyers know exactly how many units they are going to get for their investment and sellers know exactly how much money they will get for their units Managers are exposed to the risk that the trust's assets may increase between the valuation and dealing points, in which case the units will be under-priced Forward pricing , which is much more common, entails basing prices on NAV calculated at the next valuation point . On this basis, someone buying units at 4pm i... Shortened demo course. See details at foot of page. ... appliesDiscretionary portfolios and fund of funds Discretionary portfolio managers and fund of fund managers may carry two levels of charges: A charge to remunerate the manager of the underlying fund A further cost to cover the overall strategic management of the portfolio Performance related charges Performance-related fees can be charged as long as they are fully disclosed in the literature. The fees can be growth-based, related to the outperformance of a benchmark, or a combination of both. They are payable in addition to other annual fees. Stakeholder charges To qualify as a stakeholder product, the maximum total annual charge is capped at 1.5% for the first 10 years and 1% thereafter, with no initial charge. What two levels of charges may discretionary portfolio managers and fund of fund managers carry? Answer : Purchase course for answer An open-ended investment company (OEIC) is very similar to a Unit Trust, in that it is a diversified collective investment. An OEIC can also be known as an Investment Company with Variable Capital (ICVC); both terms are interchangeable. In the UK, OEICs are the preferred structure for a collective investment, with the majority of new funds being constructed on this basis and many Unit Trusts transferring to the more flexible format.
Legal & regulatory structure An OEIC is a company incorporated under the Financial Services and Markets Act (FSMA) and authorised under the provisions of a statutory instrument made by the Treasury, known as the ICVC Regulations. An OEIC is operated by a board of directors, which may comprise of a single authorised corporate director (ACD) The assets must be held separately and this is undertaken by a Depositary Both the Depositary and the ACD must be authorised and regulated by the FCA The OEIC must be authorised in its own right if it ... Shortened demo course. See details at foot of page. ... at the discretion of the ACD.The ACD may also impose a charge to cover Stamp Duty Reserve Tax (SDRT). Dealing in OEICs is very similar to dealing in Unit Trusts. The ACD issues contract notes and may also issue share certificates. They are also permitted to issue bearer certificates, which may be useful for non-UK domiciled investors. Advantages of OEICs There are several advantages compared to unit trusts: OEICs are the most widely recognised structure in Europe meaning that funds can be marketed internationally, which is not possible with Unit Trusts Multiple share classes allow for greater flexibility in terms of charges and currency Umbrella funds offer investors a wide range of funds with different investment objectives and share classes. Simplified switching between sub funds Umbrella funds also make it easier for managers to create new funds Who is the equivalent party in an OEIC to an investment manager in a Unit Trust? Answer : Purchase course for answer Unit Trust and OEIC management services
Unit Tusts and OEICs can be purchased directly from the fund manager or via a number of different routes. Multi Managers A service offered by both Unit Trusts and OEICs is the concept of Multi Managers. These allow investors to spread their money between different managers or funds to achieve a better level of diversification and balance than just using one fund. This can be through a Fund of Funds or a Manager of Manager Fund. Fund of Funds A fund of funds invests in a selection of other funds. They can be internal funds of the same management group (fettered) or can be external funds, i.e. they can select from any fu... Shortened demo course. See details at foot of page. ...n a tax-efficient wrapper such as an ISA or a pension.Depending on the scope of the platform, investors will be able to see all their investments in one place and make decisions that can impact on some or all or of them, such as changes to asset allocation or risk strategy. The ability to track the account online makes it easier for the investor to keep track of all aspects of their portfolio. Rebate payments from product providers to platforms and cash rebates to consumers are banned and platform providers must make an explicit platform charge to be agreed by the investor. How does a manager of managers fund work.? Answer : Purchase course for answer These funds are established outside the UK and structured as an OEIC . They have similar characteristics to those we have discussed in the previous sections.
Recognised funds Offshore funds must be FCA recognised to be promoted to retail UK investors. They must be recognised under section 272 of the FSMA 2000 (individually recognised overseas schemes) or must be entered into the temporary marketing permissions regime (TMPR). This allows EEA funds that were passported into the UK to continue to be marketed in the same way as they were before whilst seeking UK recognition. The TMPR will continue for 3 years with a power to extend for 12 months in certain situations. UK marketing status Offshore funds that are recognised by the FCA can be marketed in the UK in the same way as authorised Unit Trusts. Funds without FCA recognition are severely restricted and cannot be marketed to the general publ... Shortened demo course. See details at foot of page. ...h a range of sub funds covering each of the major currencies and some of the minor onesSome groups also offer a choice of non-distributor and distributor sub funds Switching between funds is cheap and simple Some funds are also run to capitalise on currency fluctuations Fund denomination Most offshore funds are denominated in a currency other than sterling, and the denomination may be driven by the target audience rather than specific currency considerations. Some managers will hedge against currency changes to reduce the impact of currency changes on the returns of the fund. Specialist Funds These are outside the mainstream investment categories and could include physical commodities, derivatives and warrants. These tend to fall outside the categories that the FCA will allow to be marketed in the UK. How are offshore funds classified for tax purposes? Answer : Purchase course for answer PART 1 INVESTMENT TRUSTS
Investment Trusts are among the oldest and most widely used type of collective and offer an alternative way of investing in a collective other than Unit Trusts and OEICs. An Investment Trust is a Public Limited Company, whose business is to invest in other companies. They are established under company law and have Articles of Association that show any restrictions in the activities they can undertake. They are regulated under the Companies Act in addition to the FCA and HMRC. They can invest in any kind of company whether or not the shares are listed on a recognised stock market They provide venture capital to new firms or firms that wish to expand They can invest in any country in the world When a customer buys into an Investment Trust, they buy shares in the same way as they coulld buy shares in individual companies such as Marks and Spencer or Boots.... Shortened demo course. See details at foot of page. ...as with any other share) its price is mainly governed by supply and demand within the market. There is no direct link with the value of the underlying assets and the price at which the Investment Trust’s shares trade.The share price seen in the newspapers is the mid-price, but dealers quote the bid and the offer prices. The bid price (as with Unit Trusts) is the price at which investors can sell their Investment Trust shares. The offer price, the higher of the two prices, is the price at which an investor purchases shares in an Investment Trust. The difference here is that it is not referred to as a Bid-Offer Spread but as a Market Makers Spread or Turn. The spread varies due to supply and demand. Direct trading with the Investment Trust managers may prove a cheaper method than buying on the LSE. What type of investment schemes are Investment Trusts? Answer : Purchase course for answer PART 2 INVESTMENT TRUSTS
Regulation and approval An Investment Trust is bound by the requirements of the Companies Act, the FCA and HMRC. As a public limited company it is formed under and controlled by the Companies Act. On formation, the objectives of the trust must be recorded in the Memorandum and Articles of Association. The FCA also has a number of principles for a company seeking a listing as an Investment Trust: The investment manager must have adequate experience There must be an adequate spread of risk The company must not control or seek to control the companies in which it invests The trust must not be a dealer in investments to any significant extent The trust must have a board that can act independently of its management The trust is also required to obtain approval from HMRC under s842 of the Income and Corporation Taxes Act 1988 . Approval means that... Shortened demo course. See details at foot of page. ...ave been exercised. The result would be an increase in the number of ordinary shares, but without a proportional increase in the value of the trust assets.Example XYZ Trust plc has 1 million ordinary shares and 100,000 outstanding warrants that enable holders to purchase shares at £1.50, and 50,000 convertible loan stock. The trust's net assets are worth £10 million. The diluted NAV is calculated as follows: Net assets plus money subscribed by warrant holders / no of ordinary shares in issue plus new shares issued to warrant holders plus no of convertible loan stock £10m + (100,000 x £1.50) / 1 million + 100,000 + 50,000 = £8.83 per share The undiluted NAV would be: net assets / no of ordinary shares in issue £10 million / 1,000,000 = £10.00 per share What is meant by shareholders' funds? Answer : Purchase course for answer PART 3 INVESTMENT TRUSTS
Premiums and Discounts By looking at the NAV per share you can then compare it to the price at which the share is trading at and identify if you are paying more or less for the share than the underlying assets are worth. If you have to pay more than the NAV, the shares are trading at a premium. If you pay less than the NAV, they are trading at a discount. The calculation used to establish the premium or discount is: Step 1 – Obtain the current share price Step 2 – Compare the share price to the NAV. If the share price is higher the trust is trading at a premium, if lower it is trading at a discount Step 3 – Calculate the difference by subtracting the lower amount from the higher amount Step 4 – Take the difference from step 3 and divide it by the NAV and multiply by 100 to turn into a percentage Shares that trade at a premium may not be attractive to an investor as they have to pay more for them than the underlying assets of the company are worth. However, the share price could have been driven up because investors thought they were a good buy. Shares trading at a discount may be se... Shortened demo course. See details at foot of page. ...lready met the growth required to meet its liabilities. It could also mean that the value of the underlying investments could still fall and the requirements be met.Asset cover This is another way to assess the Investment Trust's ability to meet or cover the liability to share classes with a predetermined redemption date from existing assets. It is the ratio by which the predetermined redemption value for a class of shares is currently covered by those assets of the company that are available to them, taking into account any prior payment to higher ranking shares. Redemption In practice, when a split capital trust meets its redemption date the managers will want to retain their investors, so they will offer to reinvest the proceeds for their customers or roll them over into an alternative trust rather than send the proceeds back to the investor. By doing this they are looking to retain the customer rather than encourage them to look at other products that may be on the marketplace. What ratio is used to assess an Investment Trusts ability to meet all its liabilities to shareholders? Answer : Purchase course for answer PART 4 INVESTMENT TRUSTS
Classes of shares As previously mentioned, some trusts have complex structures which offer different classes of shares, all offering different types of return and associated risk. It is therefore important to understand the benefits, limitations and risks of each particular class. Conventional trusts The two types of share traditionally available from a conventional Investment Trust are: Ordinary Shares - These are the main type of conventional Investment Trust shares. The shareholders are entitled to all of the income and growth from the trust’s investments, subject to any borrowings with a prior charge that the trust may have Preference Shares - These pay a fixed dividend to shareholders, which must be paid before any distribution of dividends is paid to ordinary shareholders. They rank above ordinary shareholders in the event of a wind-up Split capital Investment Trust shares Originally designed in the 1960s, split capital trusts initially had two types of shares: Income shares that are broadly entitled to the total amount of income received by the Investment Trust with a predefined capital return at wind-up Capital Shares have no entitlement to income but receive the remainder of the assets on wind up This basic structure has evolved over the years to include additio... Shortened demo course. See details at foot of page. ...y trading in investments as a business. They are suitable for:Investor Share Type Risk Profile Very high income with low capital return Annuity type income shares Low risk Income with some capital protection Traditional income shares Medium risk Require income and the potential for higher capital returns Income and residual capital shares High risk No income but the potential for higher capital growth Zero dividend preference shares Low risk Higher than average capital return Capital shares Very high risk The risk profiles are only an indication and it is important to look at each Investment Trust individually to assess the level of gearing and the ability to pay out at redemption by looking at the asset cover ratio and the required hurdle rates for each type of share. A trust that has a high asset cover ratio and low gearing is likely to present a much lower risk than a trust with high levels of gearing and a low asset cover ratio. Which type of shares pay no income but pay out capital at redemption and have priority over ordinary shareholders? Answer : Purchase course for answer PART 5 INVESTMENT TRUSTS
Gearing Some trusts use borrowing to fund their investment purchases, enabling them to maximise investment opportunities as they see them. With this comes the higher level of risk attached as they use borrowed funds to make purchases and then have to achieve a growth on that asset in excess of the charges they pay to borrow to make a gain. The amount of borrowing taken on by a trust in relation to its assets can be assessed by using the gearing ratio: This is expressed as the total gross assets divided by the net assets (or shareholders' funds) multiplied by 100 Total gross assets/net assets x 100 Where the resulting figure is 100 there is no borrowing If the resulting figure was 115, then this means that the fund is geared to 15% of its scheme assets Gearing can be structured in a number of different ways and, unlike with Unit Trusts and OEICs,there are no regulatory limits regarding how much can be borrowed or for how long. Loans can be from traditional finance such as banks, in sterling or foreign currencies and they can also be raised by issuing debentures, unsecured loan stock and preference shares. Gearing can work to the advantage of investor by allowing exposure to investments to exceed the assets of the trust. Where this produces a gain in excess of the cost of borrowing, this would magnify returns to investors. Where the investment strategy fails, however, losses are also magnified, and could mean a total loss for some classes of shareholder. Where the value of the trust assets falls below a certain level, banks may call in t... Shortened demo course. See details at foot of page. ...confirming the purchase, the number and class of shares purchased and the purchase price. Shares are usually held in a nominee account to keep down costs so investors will not receive a share certificateMost major providers also now provide access to ISA wrappers linked to one or more of their trusts Taxation of Investment Trust companies Investment trusts are subject to taxation as follows: Investment Trusts that have been approved by HMRC are not subject to CGT on gains from the sale of shares or other holdings in their portfolio; There is no tax on franked income (UK dividend income); Corporation tax is payable on unfranked income (income other than UK dividends). Expenses can be set against unfranked income to reduce the tax liability. Expenses can include interest on borrowings, and management fees Taxation of investors Income and gains from an investment trust are taxed in the same way as any other shares: Dividends are paid gross The first £500 of dividend income received each tax year is tax free Income tax is due thereafter at 8.75% for a non and basic rate taxpayer, 33.75% for a higher rate taxpayer and 39.35% for an additional rate taxpayer Investors will also be liable to CGT at 10% or 20% depending on their other income in the tax year of disposal; this is payable on any realised gains that exceed the annual CGT exempt amount and the deduction of any previous losses If held within an ISA all income and capital gains are tax free What is the tax treatment of a HMRC approved Investment Trust? Answer : Purchase course for answer The relative advantages and disadvantages of Unit Trusts, OEICs and Investment Trusts
As we have seen throughout this chapter, the three different structures discussed are similar in many ways, but the differences in their structure can prove to be advantageous or have drawbacks for certain types of investors. Charges The cost of buying shares in Investment Trusts are often lower than investing in Unit Trusts There may be charges for selling Investment Trust shares which would not apply for Unit Trusts Annual management charges on older Investment Trusts can... Shortened demo course. See details at foot of page. ...t and OEIC that do not exist in Investment Trust format, such as guaranteed or protected funds where derivatives are used to protect shareholders against falling share pricesThere are also some Investment Trusts that do not exist in Unit Trust or OEIC formats, e.g. private equity trusts Investment Trusts are closed-ended public limited companies whereas Unit Trusts and OEICs are open-ended funds If an investment trust’s shares are trading at a discount to its NAV, what does it means for the investor if the discount widens further? Answer : Purchase course for answer Feature Unit Trust OEIC Investment Trust Legal structure Trust
Limited company Plc Stock exchange listing No Optional Required Nature of fund Open-ended Open-ended Closed-ended Management of assets Fund Manager who must be authorised by the FCA Authorised Corporate Director (ACD) who must be authorised by the FCA May be self- managed or managed by a third party authorised investment company Supervision Trustee Depositary Independent Board of Directors Scope ... Shortened demo course. See details at foot of page. ...>Bid/offer spreadAnnual management charge Initial charge Annual management charge Bid/offer spread Annual management charge Regulation Unit Trust must be authorised by the FCA. Trustee and fund manager must be authorised by the FCA Marketing regulated by the FCA Structural framework provided by Treasury regulations (ICVC) OEIC authorised by the FCA ACD and depositary authorised by the FCA Companies Act FCA listing rules ICTA 1988 s842 External investment management and ITSS/ISA operator authorised under FSMA 2000 Your results and the estimated s... Shortened demo course. See details at foot of page. ...ate.Estimated study time 8.1 hours |
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