Faculty of ActuariesInstitute of Actuaries
EXAMINATIONS
10 September 2001 (pm)
Subject 401 — UK Fellowship Investment
Paper Two
You must answer this subject only,
you may not attempt another subject in the 400 series.
Time allowed: Three hours
INSTRUCTIONS TO THE CANDIDATE
1.
You have 15 minutes at the start of the examination in which to read thequestions. You are strongly encouraged to use this time for reading onlybut notes may be made. You then have three hours to complete the paper.You must not start writing your answers in the booklet until instructed todo so by the supervisor.
Write your surname in full, the initials of your other names and yourCandidate’s Number on the front of the answer booklet.Mark allocations are shown in brackets.
Attempt all questions, beginning your answer to each question on aseparate sheet.
AT THE END OF THE EXAMINATION
Hand in BOTH your answer booklet and this question paper.
2.3.4.5.
In addition to this paper you should have availableActuarial Tables and an electronic calculator.
401(2)—S2001 (28.2.01)
? Faculty of Actuaries? Institute of Actuaries
1
You are Chief Investment Officer of an asset management company with ￡20billion of funds under management. The product range covers unit trusts,
investment trusts, pension funds and the accounts of discretionary private clientsand involves both UK and overseas domiciles for the funds. You have 54 staffand they are arranged in teams by asset class and within equities by geographicregion except for one, who is the investment strategist and seven, who managethe portfolios and client servicing for your 95 pension fund clients, amounting to￡12 billion. The investment trust business amounts to ￡2 billion (6 clients), theunit trust business to ￡5 billion (15 funds), open-ended investment companies(one multi-class, 5 classes) are ￡0.75 billion and private clients are the balance.You do not undertake direct property investment.(i)
The marketing manager wishes to produce a brochure on the companyand would like to illustrate how the investment team functions.Draw a schematic outlining the appropriate structure including thenumber of staff in each team.
(ii)
[4]
The head of sales, on seeing this schematic, suggests that it might be moreappropriate to have the teams structured along product lines.Discuss the advantages and disadvantages of such a structure.
[8]
(iii)
Your strategist suggests that, as an alternative to both, the geographicequity teams should be rearranged into global sector based teams. Hebelieves that fewer staff would be required and that stock selection wouldbe better.
Outline the arguments for and against this view.
[9]
(iv) The distribution of assets for your balanced pension fund is shown below.UK Equities US Equities
European EquitiesJapanese EquitiesAsia Pacific Equities
50%8% 4% 8%
Fixed InterestCashHedges
Other Equities
14%3%2%1%
Total 100%
Comment on the asset allocation of the balanced pension fund and givefull details of what additional information you would require to fullyassess this allocation.[10]
(v)
A trustee of one of your segregated pension fund clients has noted thatinvestment outside the UK has not added value to his fund’s return eitherin bonds or equities over the last one-year and ten years. He also notesthat the bond portfolio has only conventional gilts whose duration isgreater than fifteen years. He suggests that more diversification in thedomestic bond portfolio would be more productive.
Explain fully what returns have been achieved from the various markets,what has influenced these returns and comment upon his suggestion. Youare asked to make a recommendation giving reasons for it.[15]
401(2) S2001—2
(vi)
In light of the volatility in commodity prices, the sales director hassuggested that you launch a new open-ended investment companycommodity fund and has requested a paper for discussion at the nextboard meeting.
Discuss the points to be included in this paper giving due consideration toall the issues involved in structuring and running such a fund.[10]
[Total 56]
2
You are the investment manager of a ￡3 billion global equity portfolio whose basecurrency is sterling. The investment mandate requires that the fund’s currencyexposure be fully hedged.(i)
Compare the use of forward and futures foreign exchange contracts forhedging currency exposures for the equities and index derivatives in yourportfolio.[14]Describe the cash flow problems that you could face in using theseinstruments to hedge underlying exposures.
[5]
(ii) (iii)
State, with reasons, which of the two instruments the portfolio should use.
[3]
[Total 22]
3
A financial adviser, who has a number of clients with regular income needs, hasapproached you for advice on a new investment trust that is to be launched. Itwill be a highly geared trust investing 50% of its gross assets in global fixed
interest securities and 50% in other investment trusts. The starting yield on theglobal fixed interest portfolio will be 200 basis points over Libor and the yield onthe investment trust portfolio will be not less than 1.5% per annum. It is
proposed that ￡60 million will be raised as equity and a bank loan for ￡40 millionhas been agreed with ABC Bank plc. at an interest rate of Libor plus 85 basispoints. The fund management fee will be 1% per annum of gross assets. Boththe fund management fee and the interest costs will be charged against capital.Administration costs will be ￡80,000 per annum and will be charged to therevenue account. The fund is to be domiciled in an offshore location for tax
purposes and will not be subject to any local taxes. It is expected that all incomewill be distributed as dividends and paid quarterly. All launch expenses will bepaid for by the fund management group that is proposing the launch. The life ofthe investment trust will be seven years.(i) (ii) (iii)
Calculate the likely minimum starting dividend per share that the trustcould pay assuming 60 million shares are issued at 100 pence each.[3]Calculate the minimum annual capital return required from the portfolioso that the original capital will be returned after seven years.[2]Draft a report for the adviser on this proposed trust and outline anyalternative investments that he might consider. (There are 4 marksavailable for drafting.)[17]
[Total 22]
401(2) S2001—3
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