1. Certificate for Introduction to Securities & Investment (Cert.ISI) Unit 1 Lesson 43:  The range of funds available to investors  IMA classifications  Regulation of funds  Authorised versus unauthorised funds  UCITS  Onshore versus Offshore funds 43cis

2. The range of available investment funds There are over 2,000 authorised investment funds available to investors in the UK  Open-ended means that the number of shares, or units, in the fund is not fixed:  It expands or contracts in line with the amounts of money invested in the fund or withdrawn from the fund The IMA maintains a system for classifying funds. The funds are sorted into around 30 sectors grouped under four main investment styles:  Income funds  Growth funds  Specialist funds The 30-odd sectors are defined by the asset categories, such as:  UK gilts  UK corporate bonds  Global bonds Investors can compare funds within a sector, knowing that they are comparing like-for-like  Capital protection The Investment Management Association (IMA) is the trade body for UK authorised open-ended funds industry. The Association of Investment Companies (AIC) performs a similar role for investment trusts, the close-ended companies.

3. IMA investment fund classification Broad sector headings:  Growth  Equity  Mixed asset  Income  Fixed income  Equity  Mixed Asset  Capital protection  Specialist  Unclassified  Absolute Return -Offshore  Absolute Return - UK  Active Managed  Asia Pacific Excluding Japan  Asia Pacific Including Japan  Balanced Managed  Cautious Managed  Europe Excluding UK  Europe Including UK  European Smaller Companies  Global Bonds  Global Emerging Markets  Global Growth  Japan  Japanese Smaller Companies  Money Market  North America  North American Smaller Companies  Pensions  Property  Protected  Technology & Telecoms  UK All Companies  UK Equity & Bond Income  UK Equity Income  UK Gilt  UK Index Linked Gilt  UK Smaller Companies  £ Corporate Bond  £ High Yield  £ Strategic Bond

4. The investment industry has many regulations that are designed to protect investors. Some of these govern where and how a fund manager can invest – and the documentation an investor can expect to receive. Regulation of funds The regulatory regime for UK authorised funds is heavily influenced by EU directives which have been issued in order to promote a single market in investment funds. In the UK, these directives are implemented by the FSA through its Collective Investment Schemes Sourcebook, COLL

5. In the UK, some collective investment schemes are authorised and some are unauthorised  Authorisation is granted by the FSA  The FSA will only authorise schemes which are sufficiently diversified and that invest in a range of permitted assets Authorised versus Unauthorised Funds  Unauthorised schemes are legal but marketing is subject to specific rules and only certain types of investor m ay be approached o Broadly speaking unauthorised schemes may by marketed only to investment professionals or sophisticated investors.  Unauthorised schemes cannot be marketed to the general public

6. The FSA will crack down hard on authorised investment schemes if they are mis-sold to UK investors Unauthorised Funds

7. UCITs is the acronym for “Undertakings for Collective Investment in Transferable Securities”. It refers to a series of EU regulations that were aimed at making it easier to promote funds to retail investors right across Europe  The original UCITs directive was issued in 1985 and established EU-wide rules governing collective investment schemes UCITs The EU plan was to enable collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state. In practice many EU member nations have imposed additional regulations that have had the effect of protecting local asset managers  Since then, two further UCITs directives have been issued  These have broadened the range of assets that funds can invest in o For instance, managers can now invest in derivatives  They have also permitted the marketing of a simplified prospectus  Other jurisdictions, such as Switzerland and Hongkong, recognise UCITs Bernard Madoff’s LuxAlpha collective investment vehicle was authorised under the UCITs regime

8. Some UK collective investment schemes are established and operated in the UK and are described as being “onshore” funds  Offshore locations include several “British-sounding” territories Onshore versus offshore funds Schemes that are established outside the UK are often described as “offshore” funds.  Some (but not all) offshore vehicles are less heavily regulated than their UK equivalents  Other common offshore locations for funds include:  Dublin  This might be seen as enabling those funds to pursue a more risky strategy  Jersey  Guernsey  Luxembourg  The Isle of Man

9. Offshore funds are likely to be subject to different tax treatment from their UK onshore equivalents  Certain offshore funds have been granted “reporting” status by HM Revenue and Customs Tax treatment for offshore funds Some offshore funds may be more tax-efficient for UK investors but others are not.  Unless an offshore fund is certified by HMRC as a reporting fund, UK investors are subject to income tax rather than capital gains tax on any gain arising from the disposal of their interests in the fund. Since the current highest marginal rate of income tax of 50% is significantly higher than the flat CGT rate of 18%, obtaining reporting-fund status is of crucial importance to most UK individual investors.  Offshore funds can be marketed in the UK if the FSA is satisfied that they meet FSA criteria for authorised funds  Offshore funds that meet the FSA criteria are known as “recognised schemes” HMRC has a list of 10,057 offshore collective investment schemes that have been granted “reporting” status