2.6 - asset classes: CISs

what is a CIS

collective investment scheme

two type of CIS (in terms of regulation)

CIS - regulated CIS, marketable

UCIS - unregulated CIS, unmarketable

UCISs are…

…unauthorised

…not recognised by the local regulator

5 typical risks in a UCIS

liquidity

gearing

geo-political

currency

cost

liquidity risks

initial lock in periods eg. between 1 and 3 months

gearing (aka leverage) risks

using borrowing + derivatives to create gearing

geo-political risks

may expose investor to less politically stable parts of the world

currency risks

may have base currency other than the investors home

cost risks

performance related fees

what is a unit trust

a fund set up as a trust rather than as an ordinary compnay

show the structure of a unit trust

.

what is a trust deed

an agreement made between the fund manager and the trustee - like a rulebook for the fund

what is the manager’s role

market units

manage assets

maintain record of units

what is the trustee’s role

protect unit holder’s interests

take title of underlying assets

create/cancel units

so what happens to your money when you invest in a unit trust

you give the fund money, you receive units in return

the manager invests the pooled money

the trustee safeguards the assets + protects your interests

the value of the investments hopefully rise, meaning that the value of your units should also hopefully rise

what is NAV

net asset value

how is NAV calculated

assets minus liabilities

how is NAV per unit calculated

NAV of portfolio over number of units in issue

what is a valuation point

the specified time at which the fund values its investments to calculate the unit price

eg. at noon each business day

3 types of charges in a CIS

initial charge —> fee for when you first invest

exit charge (aka dilution levy) —> fee for selling or redeeming your investment

management charge —> ongoing fee for fund management

open vs closed ended funds

open ended:

variable size - can create and cancel units/shares based on demand

units priced directly at NAV per share

sell back to fund to exit

liquid underlying assets

closed ended:

fixed shares through one IPO

units priced through supply + demand on stock exchange

must sell on secondary market to exit

illiquid underlying assets - uses gearing to amplify returns

what is an OEIC

open ended investment company

like a unit trust but set up as a company, not a trust, so you buy shares, not units

3 main parts of an OEIC

they work in a similar way to how they all did on the unit trust setup

what is an ITC

investment trust company

a type of closed ended fund whose shares are traded on the stock exchange and which invests in a portfolio of assets

when the price on the stock market is different to the NAV what do we refer to that as

a discount if the market price is below NAV per share

a premium if the market price is above NAV per share

what is an ETF

exchange traded fund

tracks an index (eg. FTSE100 or something more sector specific)

many ETFs are…

…open ended

BUT you can trade them on exchanges usually