Investment Funds chp 7
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Questions and Answers

Which type of investment involves an individual personally buying shares in a company?

  • Indirect investment
  • Direct investment (correct)
  • Closed-ended funds
  • Collective investment scheme

    • What is the term used for funds that pool the resources of many investors to provide access to a range of investments?

  • Closed-ended funds
  • Indirect investment
  • Collective investment schemes (correct)
  • Open-ended funds

    • Which type of fund can create new shares in response to investor demand or cancel them when sold?

  • Indirect investment
  • Closed-ended funds
  • Direct investment
  • Open-ended funds (correct)

    • What is another name for open-ended investment companies (OEICs)?

    <p>Mutual funds</p> Signup and view all the answers

    Which type of investment vehicle includes the term 'internationally recognised'?

    <p>Collective investment schemes</p> Signup and view all the answers

    In which type of investment, investors find indirect investment very attractive due to the requirement of a significant amount of money for direct investments?

    <p>Indirect investment</p> Signup and view all the answers

    What type of fund has a fixed capital base and allows investors to buy and sell shares on the stock exchange?

    <p>Closed-ended fund</p> Signup and view all the answers

    Where are investment funds often structured as Société d’Investissement à Capital Variable (SICAV)?

    <p>Luxembourg</p> Signup and view all the answers

    What type of funds comply with the rules of the EU UCITS directive and are often marketed internationally?

    <p>UCITS funds</p> Signup and view all the answers

    What is one of the benefits of investing in collective investment funds?

    <p>Access to professional investment management</p> Signup and view all the answers

    Why might an investor choose to invest in a diversified portfolio of investments?

    <p>To mitigate the risk of significant loss</p> Signup and view all the answers

    Which region has one of the widest ranges of funds available in the Gulf region?

    <p>Bahrain</p> Signup and view all the answers

    What type of funds are categorised under 'income' and 'growth'?

    <p>Open-ended funds</p> Signup and view all the answers

    In core-satellite management, what does the 'core' typically refer to?

    <p>Indexing a majority of the portfolio's value</p> Signup and view all the answers

    What is a common characteristic of actively managed funds compared to passively managed funds?

    <p>Higher charges</p> Signup and view all the answers

    What distinguishes the top-down approach in active management from the bottom-up approach?

    <p>Analysis of economic and industry trends</p> Signup and view all the answers

    How does combining index-trackers with actively managed funds minimize risk?

    <p>By indexing a majority of the portfolio's value</p> Signup and view all the answers

    'Momentum investing' involves picking shares based on what criteria?

    <p>Continued rising share prices</p> Signup and view all the answers

    'Value investing' primarily involves selecting shares of companies that are:

    <p>'Undervalued'</p> Signup and view all the answers

    'Contrarian investing' differs from 'momentum investing' in that it focuses on:

    <p>'Out of favour' shares with hidden value</p> Signup and view all the answers

    'Smart beta funds' aim to combine elements of both traditional passive and active investing by targeting what type of investment ideas?

    <p>'Value-creating' ideas like bargains and momentum</p> Signup and view all the answers

    'Bottom-up' analysis in active management prioritizes examining which aspect of a company?

    <p>'Future profitability'</p> Signup and view all the answers

    What pricing method is commonly used by most OEICs?

    <p>Single pricing based on the market value of underlying assets</p> Signup and view all the answers

    Who is considered the legal owner of the fund investments in an OEIC structure?

    <p>Depository</p> Signup and view all the answers

    What is the role of the ACD in an OEIC?

    <p>Maintaining the register of shareholders</p> Signup and view all the answers

    How are dealing expenses and commissions typically handled in single-priced funds?

    <p>Charged separately for each transaction</p> Signup and view all the answers

    What distinguishes single-pricing from dual-pricing in OEICs?

    <p>Method of valuing fund assets</p> Signup and view all the answers

    What is the key characteristic that distinguishes a mutual fund from other types of investment funds?

    <p>Ability to create and sell new shares</p> Signup and view all the answers

    How do investors typically buy mutual fund shares?

    <p>Directly from the fund itself</p> Signup and view all the answers

    Which entity values the investment portfolio of a mutual fund daily to determine the NAV?

    <p>The mutual fund itself</p> Signup and view all the answers

    What is the basis for the price investors pay when buying mutual fund shares?

    <p>Net Asset Value (NAV) plus redemption charges</p> Signup and view all the answers

    How often must mutual funds redeem or buy back investors' shares?

    <p>Any business day</p> Signup and view all the answers

    What are some of the costs involved in operating a mutual fund?

    <p>Investment advisory fees, shareholder transaction charges, and marketing expenses</p> Signup and view all the answers

    In what way do mutual funds pass along operating costs to investors?

    <p>By imposing charges on investors</p> Signup and view all the answers

    What is the tax treatment for income generated by a tax-exempt mutual fund?

    <p>Tax is due on capital gains only</p> Signup and view all the answers

    Which entity requires mutual funds to distribute capital gains to shareholders annually?

    <p>Securities Exchange Commission (SEC)</p> Signup and view all the answers

    Where can investors find the Net Asset Value (NAV) of a mutual fund?

    <p>On the fund's website and in major newspapers</p> Signup and view all the answers

    What is the main type of open-ended fund encountered in Europe that translates to an open-ended investment company?

    <p>SICAV</p> Signup and view all the answers

    In Europe, what are the three main types of funds encountered?

    <p>SICAVs, unit trusts, OEICs</p> Signup and view all the answers

    What structure are FCPs based on in Europe?

    <p>Contract between scheme manager and investors</p> Signup and view all the answers

    What does UCITS refer to in Europe?

    <p>EU regulations for fund promotion</p> Signup and view all the answers

    Which type of fund is typically valued daily in Europe?

    <p>SICAVs</p> Signup and view all the answers

    What is the legal structure of a SICAV?

    <p>Company</p> Signup and view all the answers

    What is a key characteristic of SICAVs in terms of share dealings?

    <p>&quot;Shares are bought or sold based on market price&quot;</p> Signup and view all the answers

    Who is responsible for the day-to-day management of a unit trust fund?

    <p>The unit trust manager</p> Signup and view all the answers

    What is the role of the trustee in a unit trust?

    <p>Holding the assets for the benefit of unitholders</p> Signup and view all the answers

    Why are unit trusts described as 'dual-priced'?

    <p>As they have separate prices for buying and selling units</p> Signup and view all the answers

    What is the main function of an authorised corporate director (ACD) in an OEIC?

    <p>Valuing and pricing the fund</p> Signup and view all the answers

    In an OEIC, what is the role of the depository?

    <p>Holding the assets on behalf of shareholders</p> Signup and view all the answers

    What distinguishes a unit trust from an OEIC in terms of pricing?

    <p>Unit trusts have a single price, while OEICs have dual prices</p> Signup and view all the answers

    Which party ensures that an investor receives a price if they are selling their units in a unit trust?

    <p>Unit trust manager</p> Signup and view all the answers

    What does the trustee in a unit trust primarily aim to do?

    <p>Protect investor interests by monitoring fund actions</p> Signup and view all the answers

    What makes unit trusts different from SICAVs and OEICs in terms of pricing mechanism?

    <p>SICAVs have a single price while OEICs use dual pricing.</p> Signup and view all the answers

    What is the fundamental difference between unit trusts and OEICs regarding the management structure?

    <p>Unit trusts have a trustee and a unit trust manager, while OEICs have an authorised corporate director (ACD).</p> Signup and view all the answers

    Why might an investor consider investing in a closed-ended fund?

    <p>To avoid minimum commission rates</p> Signup and view all the answers

    What is the primary advantage of pooling resources in investment funds?

    <p>Economies of scale</p> Signup and view all the answers

    How does diversification in an investment portfolio help mitigate risk?

    <p>By balancing out underperforming investments with outperforming ones</p> Signup and view all the answers

    Which legal structure is commonly used for investment funds established in Luxembourg for international marketing?

    <p>SICAVs</p> Signup and view all the answers

    Why might an individual investor choose an OEIC over direct investments?

    <p>To avoid high commission costs on small investments</p> Signup and view all the answers

    What is a distinguishing feature of UCITS funds marketed in the Middle East and Asia?

    <p>Compliance with EU UCITS directive rules</p> Signup and view all the answers

    How do closed-ended funds differ from open-ended funds regarding their capital base?

    <p>Closed-ended funds have a fixed capital base</p> Signup and view all the answers

    What is the primary reason behind the establishment of investment funds in the UK, Ireland, and Jersey?

    <p>Access to professional investment management</p> Signup and view all the answers

    Why might an investor be attracted to investing in a diversified portfolio of investments?

    <p>To reduce the risk of total or significant loss</p> Signup and view all the answers

    What role does the UCITS branding play in international marketing of investment funds?

    <p>A measure of quality that makes them acceptable for sale in many countries</p> Signup and view all the answers

    What is the primary reason for investing in an investment fund?

    <p>To access the investing skills of the fund manager</p> Signup and view all the answers

    Why do investment funds charge fees to investors?

    <p>To cover fund managers' salaries and research technology</p> Signup and view all the answers

    What is one of the disadvantages of adopting indexation in investment funds?

    <p>Managing cash flows and rebalancing the portfolio</p> Signup and view all the answers

    Why are passive portfolios generally less expensive to run than active portfolios?

    <p>Experience lower portfolio turnover</p> Signup and view all the answers

    What is the main rationale for investing collectively in an investment fund?

    <p>Accessing the investing skills of the fund manager</p> Signup and view all the answers

    What does passive management involve in investment funds?

    <p>Mimicking the performance of a recognized index</p> Signup and view all the answers

    True or False: Passive portfolios are generally more expensive to run than active portfolios.

    <p><strong>False</strong></p> Signup and view all the answers

    True or False: Indexation assumes that securities markets are not efficiently priced and can be consistently outperformed.

    <p><strong>False</strong></p> Signup and view all the answers

    True or False: The main disadvantage of adopting indexation is managing cash flows and rebalancing portfolios.

    <p><strong>True</strong></p> Signup and view all the answers

    What distinguishes closed-ended investment companies from open-ended funds in terms of capital?

    <p>Closed-ended companies have a fixed capital base, while open-ended funds have a capital base that can expand or contract.</p> Signup and view all the answers

    Which term is used in the US to refer to closed-ended investment companies?

    <p>Closed-End Funds</p> Signup and view all the answers

    What is the primary reason for closed-ended investment companies being referred to as 'closed-ended'?

    <p>They have a limited number of shares available for trading.</p> Signup and view all the answers

    How do investors typically buy shares of closed-ended investment companies?

    <p>Through brokers on the stock market from other investors</p> Signup and view all the answers

    What aspect distinguishes closed-end funds in the US from unit investment trusts?

    <p>The fact that closed-end funds trade on stock markets</p> Signup and view all the answers

    In what way do closed-ended investment companies differ structurally from mutual funds?

    <p>Closed-ended companies have a fixed capital base, while mutual funds can expand or contract.</p> Signup and view all the answers

    What is the primary way a private equity firm achieves its principal return?

    <p>Realizing a capital gain on exit</p> Signup and view all the answers

    How do private equity firms typically raise their capital?

    <p>Mainly from large investing institutions</p> Signup and view all the answers

    What is a common structure used for private equity arrangements?

    <p>Limited partnerships with high minimum investment requirements</p> Signup and view all the answers

    Why do individuals or institutions use pooled vehicles to invest in private equity?

    <p>To diversify risk in individual buyouts</p> Signup and view all the answers

    What is a characteristic feature of private equity arrangements compared to retail investment funds?

    <p>Structured as limited partnerships</p> Signup and view all the answers

    In what ways have methods of raising private equity investment changed with the increasing amount of funds raised?

    <p>Structured differently from retail investment funds</p> Signup and view all the answers

    What is the main advantage of physical replication over synthetic replication in ETFs?

    <p>Higher accuracy in tracking the index</p> Signup and view all the answers

    Which method of index replication used in ETFs is considered subjective due to the lack of statistical analysis?

    <p>Stratified sampling</p> Signup and view all the answers

    What is the primary downside of using synthetic replication in ETFs?

    <p>Increased counterparty risk for investors</p> Signup and view all the answers

    Why does physical replication in ETFs require a large portfolio?

    <p>To accurately track the index</p> Signup and view all the answers

    What is the primary purpose of using optimisation in ETFs for index replication?

    <p>To find a representative sample of securities</p> Signup and view all the answers

    Which characteristic differentiates ETFs from investment trusts in terms of fund size?

    <p>ETFs get smaller as people withdraw money</p> Signup and view all the answers

    What is one key difference between physical and synthetic ETF replication methods?

    <p>The counterparty risk involved</p> Signup and view all the answers

    Why do ETF shares trade at a premium or discount to the underlying investments?

    <p>To reflect supply and demand imbalances</p> Signup and view all the answers

    What role does passive management play in ETFs?

    <p>Seeks to mirror the performance of an index</p> Signup and view all the answers

    What is a common characteristic of hedge funds, as mentioned in the text?

    <p>Low initial investment requirements</p> Signup and view all the answers

    What distinguishes an investment trust from a unit trust in terms of trading securities?

    <p>Investment trusts hold a fixed portfolio of securities with little change, while unit trusts trade actively.</p> Signup and view all the answers

    Which type of investment trust is commonly referred to as a unit investment trust (UIT)?

    <p>Unit trusts</p> Signup and view all the answers

    In traditional 'absolute return' hedge funds, what is the primary aim regarding market movements?

    <p>To profit regardless of general market movements</p> Signup and view all the answers

    What does the term 'gearing' refer to in the context of hedge funds?

    <p>Borrowing funds and using derivatives to enhance returns</p> Signup and view all the answers

    What is a distinguishing feature of zero dividend preference (ZDP) shares in investment trusts?

    <p>ZDP shares receive no dividends, with returns upon repayment at a fixed future date.</p> Signup and view all the answers

    What is a key characteristic of private equity investments as discussed in the text?

    <p>Provided in return for an equity stake in high-growth companies</p> Signup and view all the answers

    How are share prices for closed-ended investment companies determined?

    <p>Not necessarily the same as the value of underlying investments</p> Signup and view all the answers

    What does attracting private equity investment involve for a firm, according to the text?

    <p>Exchanging equity stake for financing</p> Signup and view all the answers

    What is one major advantage investment trust companies have over OEICs and unit trusts in terms of investing?

    <p>They issue multiple types of shares like ordinary and preference shares.</p> Signup and view all the answers

    What is a distinguishing feature of private equity compared to traditional loans?

    <p>Involves exchanging equity stake for funding</p> Signup and view all the answers

    In contrast with unit trusts, how do investment trust companies handle borrowing money?

    <p>They borrow money on a long-term basis.</p> Signup and view all the answers

    What aspect of private equity investments makes investors face the risk of failure, similar to other shareholders?

    <p>Growth and profitability dependence</p> Signup and view all the answers

    What distinguishes convertible preference shares from zero dividend preference (ZDP) shares in investment trusts?

    <p>Convertible preference shares can be exchanged for ordinary shares.</p> Signup and view all the answers

    What allows owners of UIT units to sell them back to sponsors and lets other investors buy UIT units?

    <p>A secondary market maintained by fund managers</p> Signup and view all the answers

    'Core-satellite management' typically refers to what in private equity investments?

    <p>Combining different investment strategies</p> Signup and view all the answers

    'Momentum investing' primarily involves picking shares based on what criteria?

    <p>'Market movements'</p> Signup and view all the answers

    What type of fund typically organizes as closed-end funds due to their focus on markets with more illiquid securities?

    <p>Unit investment trusts</p> Signup and view all the answers

    What is a feature that distinguishes hedge funds from traditional mutual funds?

    <p>Ability to take long and short positions in assets</p> Signup and view all the answers

    What is the main difference between an investment trust and unit trust's approach to trading securities?

    <p>Unit trusts are focused on long-term investments, while investment trusts actively trade securities.</p> Signup and view all the answers

    What is the primary reason investment trust company shares generally trade at a discount to their NAV?

    <p>Unrealised gains that may one day be realised</p> Signup and view all the answers

    Why might investment trusts trade at a discount if fund managers charge fees but fail to add value to investments?

    <p>Poor performance in managing the fund</p> Signup and view all the answers

    What can contribute to a smaller discount (or even a premium) in investment trusts nearing winding-up or undergoing corporate activity?

    <p>Mergers/takeovers or nearing wind-up</p> Signup and view all the answers

    What is one reason often suggested for the discounts in closed-ended funds like investment trust companies?

    <p>Overcharging of management fees</p> Signup and view all the answers

    How do Real Estate Investment Trusts (REITs) differ from traditional property company investments regarding taxation?

    <p>REITs pay corporation tax but investors are not liable for tax on dividends or growth</p> Signup and view all the answers

    What feature of REITs enables investors to access property returns without facing the risk of double taxation?

    <p>Tax-free distributions at all levels</p> Signup and view all the answers

    What risk does investing in Real Estate Investment Trusts (REITs) help mitigate compared to holding direct property?

    <p>Liquidity risk</p> Signup and view all the answers

    What is a distinguishing feature of Real Estate Investment Trusts (REITs) compared to traditional property investments regarding liquidity risk?

    <p>REITs mitigate liquidity risk associated with direct property investments</p> Signup and view all the answers

    What role does REITs play in providing access to property returns without facing double taxation?

    <p>They provide tax-free distributions at all levels</p> Signup and view all the answers

    What could be a potential disadvantage of REITs in comparison to traditional property investments?

    <p>Reduced control over individual property decisions</p> Signup and view all the answers

    How does the taxation method for Real Estate Investment Trusts (REITs) differ from that of traditional property company shares?

    <p>No corporation tax is paid by REITs, and investors are taxed on distributions received</p> Signup and view all the answers

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