Investment Funds chp 7

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

Direct investment

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

Collective investment schemes

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

Open-ended funds

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

Mutual funds Signup and view all the answers

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

Collective investment schemes 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?

Indirect investment 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?

Closed-ended fund Signup and view all the answers

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

Luxembourg Signup and view all the answers

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

UCITS funds Signup and view all the answers

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

Access to professional investment management Signup and view all the answers

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

To mitigate the risk of significant loss Signup and view all the answers

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

Bahrain Signup and view all the answers

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

Open-ended funds Signup and view all the answers

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

Indexing a majority of the portfolio's value Signup and view all the answers

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

Higher charges Signup and view all the answers

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

Analysis of economic and industry trends Signup and view all the answers

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

By indexing a majority of the portfolio's value Signup and view all the answers

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

Continued rising share prices Signup and view all the answers

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

'Undervalued' Signup and view all the answers

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

'Out of favour' shares with hidden value 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?

'Value-creating' ideas like bargains and momentum Signup and view all the answers

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

'Future profitability' Signup and view all the answers

What pricing method is commonly used by most OEICs?

Single pricing based on the market value of underlying assets Signup and view all the answers

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

Depository Signup and view all the answers

What is the role of the ACD in an OEIC?

Maintaining the register of shareholders Signup and view all the answers

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

Charged separately for each transaction Signup and view all the answers

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

Method of valuing fund assets Signup and view all the answers

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

Ability to create and sell new shares Signup and view all the answers

How do investors typically buy mutual fund shares?

Directly from the fund itself Signup and view all the answers

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

The mutual fund itself Signup and view all the answers

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

Net Asset Value (NAV) plus redemption charges Signup and view all the answers

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

Any business day Signup and view all the answers

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

Investment advisory fees, shareholder transaction charges, and marketing expenses Signup and view all the answers

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

By imposing charges on investors Signup and view all the answers

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

Tax is due on capital gains only Signup and view all the answers

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

Securities Exchange Commission (SEC) Signup and view all the answers

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

On the fund's website and in major newspapers 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?

SICAV Signup and view all the answers

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

SICAVs, unit trusts, OEICs Signup and view all the answers

What structure are FCPs based on in Europe?

Contract between scheme manager and investors Signup and view all the answers

What does UCITS refer to in Europe?

EU regulations for fund promotion Signup and view all the answers

Which type of fund is typically valued daily in Europe?

SICAVs Signup and view all the answers

What is the legal structure of a SICAV?

Company Signup and view all the answers

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

"Shares are bought or sold based on market price" Signup and view all the answers

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

The unit trust manager Signup and view all the answers

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

Holding the assets for the benefit of unitholders Signup and view all the answers

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

As they have separate prices for buying and selling units Signup and view all the answers

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

Valuing and pricing the fund Signup and view all the answers

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

Holding the assets on behalf of shareholders Signup and view all the answers

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

Unit trusts have a single price, while OEICs have dual prices 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?

Unit trust manager Signup and view all the answers

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

Protect investor interests by monitoring fund actions Signup and view all the answers

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

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

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

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

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

To avoid minimum commission rates Signup and view all the answers

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

Economies of scale Signup and view all the answers

How does diversification in an investment portfolio help mitigate risk?

By balancing out underperforming investments with outperforming ones Signup and view all the answers

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

SICAVs Signup and view all the answers

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

To avoid high commission costs on small investments Signup and view all the answers

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

Compliance with EU UCITS directive rules Signup and view all the answers

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

Closed-ended funds have a fixed capital base Signup and view all the answers

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

Access to professional investment management Signup and view all the answers

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

To reduce the risk of total or significant loss Signup and view all the answers

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

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

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

To access the investing skills of the fund manager Signup and view all the answers

Why do investment funds charge fees to investors?

To cover fund managers' salaries and research technology Signup and view all the answers

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

Managing cash flows and rebalancing the portfolio Signup and view all the answers

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

Experience lower portfolio turnover Signup and view all the answers

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

Accessing the investing skills of the fund manager Signup and view all the answers

What does passive management involve in investment funds?

Mimicking the performance of a recognized index Signup and view all the answers

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

False Signup and view all the answers

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

False Signup and view all the answers

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

True Signup and view all the answers

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

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

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

Closed-End Funds Signup and view all the answers

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

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

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

Through brokers on the stock market from other investors Signup and view all the answers

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

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

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

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

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

Realizing a capital gain on exit Signup and view all the answers

How do private equity firms typically raise their capital?

Mainly from large investing institutions Signup and view all the answers

What is a common structure used for private equity arrangements?

Limited partnerships with high minimum investment requirements Signup and view all the answers

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

To diversify risk in individual buyouts Signup and view all the answers

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

Structured as limited partnerships Signup and view all the answers

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

Structured differently from retail investment funds Signup and view all the answers

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

Higher accuracy in tracking the index Signup and view all the answers

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

Stratified sampling Signup and view all the answers

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

Increased counterparty risk for investors Signup and view all the answers

Why does physical replication in ETFs require a large portfolio?

To accurately track the index Signup and view all the answers

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

To find a representative sample of securities Signup and view all the answers

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

ETFs get smaller as people withdraw money Signup and view all the answers

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

The counterparty risk involved Signup and view all the answers

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

To reflect supply and demand imbalances Signup and view all the answers

What role does passive management play in ETFs?

Seeks to mirror the performance of an index Signup and view all the answers

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

Low initial investment requirements Signup and view all the answers

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

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

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

Unit trusts Signup and view all the answers

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

To profit regardless of general market movements Signup and view all the answers

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

Borrowing funds and using derivatives to enhance returns Signup and view all the answers

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

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

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

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

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

Not necessarily the same as the value of underlying investments Signup and view all the answers

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

Exchanging equity stake for financing Signup and view all the answers

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

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

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

Involves exchanging equity stake for funding Signup and view all the answers

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

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

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

Growth and profitability dependence Signup and view all the answers

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

Convertible preference shares can be exchanged for ordinary shares. 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?

A secondary market maintained by fund managers Signup and view all the answers

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

Combining different investment strategies Signup and view all the answers

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

'Market movements' 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?

Unit investment trusts Signup and view all the answers

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

Ability to take long and short positions in assets Signup and view all the answers

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

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

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

Unrealised gains that may one day be realised 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?

Poor performance in managing the fund 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?

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

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

Overcharging of management fees Signup and view all the answers

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

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

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

Tax-free distributions at all levels Signup and view all the answers

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

Liquidity risk 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?

REITs mitigate liquidity risk associated with direct property investments Signup and view all the answers

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

They provide tax-free distributions at all levels Signup and view all the answers

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

Reduced control over individual property decisions 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?

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