Deck 12: Managed Funds: Professionally Managed Portfolios

Question 1

An aggressive growth managed fund is least likely to purchase a share

A) with a high P/E ratio.
B) of an unseasoned firm.
C) with a high anticipated rate of growth.
D) with a high dividend yield.

Answer 1

D

Question 2

One drawback of investing in managed funds is the

A) lack of information on the performance of the fund.
B) amount required for the initial investment.
C) lack of liquidity of fund units.
D) annual management fee.

Answer 2

D

Question 3

Managed fund investors delegate all of the following decisions to the fund's managers except

A) how to allocate investments among different classes of assets such as shares, bonds, cash and real estate.
B) how many securities to hold in the portfolio.
C) which companies and industries to invest in.
D) when to buy and sell individual shares.

Answer 3

A

Question 4

The primary objective of an equity- income fund is

A) high risk- return trade- offs.
B) current income with capital preservation.
C) potentially high capital gains with limited income.
D) capital gains.

Question 5

Last year, Sue purchased a listed fund that was trading at $42 and had an NTA of $38. Sue sold the fund today when the NTA is $44 and the market price is $43. The fund paid $1 in dividends over the past year. What is the Sue's holding period return?

A) 7.1%.
B) 11.6%.
C) 4.8%.
D) 18.4%.

Question 6

During the 5 year market cycle of 2004- 2008, in which category of funds did a majority of funds outperform the market average?

A) Conservative funds.
B) In no category did a majority of funds outperform the market average.
C) Growth funds.
D) Cash funds.

Question 7

An investor who wants to use managed funds as a storehouse of value should invest in

A) money funds and short- term bond funds.
B) equity- income funds and long- term bond funds.
C) growth funds and equity- income funds.
D) high- yield corporate bond funds and growth funds.

Question 8

One type of managed fund spreads investors' money across equity markets, bond markets, and money markets. Moreover, as market conditions change, the amount of money invested in each market sector will change. This type of managed fund is known as a(n)

A) socially responsible fund.
B) asset allocation fund.
C) fiscally responsible fund.
D) growth- and- income fund.

Question 9

Which type of managed fund consists of both shares and bonds with a combined objective of current income and long- term capital gains?

A) Value.
B) Bond.
C) Equity- income.
D) Balanced.

Question 10

Funds that invest in a portfolio of companies from the same or closely related industries are known as

A) asset allocation funds.
B) aggressive growth funds.
C) emerging market funds.
D) sector funds.

Question 11

Investors interested in predictable cash flow from their investments should consider funds that offer

A) automatic investment plans.
B) regular withdrawal plans.
C) conversion privileges.
D) automatic reinvestment plans.

Question 12

A fund that is designed to match the performance of a measure such as the S & P 200 is called a(n)

A) sector fund.
B) block fund.
C) targeted fund.
D) index fund.

Question 13

Last year at this time, a managed fund had an NTA of $13.20 per unit. Over the past year the fund paid dividends of $0.70 per unit and had a capital gains distribution of $1.20 per unit. What is the holding period return assuming that the current NTA is $14.42?

A) 23.6%.
B) 14.4%.
C) 13.2%.
D) 21.6%.

Question 14

The conversion privilege provided by managed fund families allows investors to

A) move from one fund family to another once every six months.
B) move from one fund to another without incurring any capital gains tax liability.
C) re- allocate their funds at any time as long as they pay an additional sales load on the transferred funds.
D) be more aggressive since they can re- allocate their funds when market conditions change.

Question 15

To operate as a regulated investment company and enjoy the related tax benefits, a managed fund must annually distribute to its shareholders

A) all of its realised capital gains, interest and dividend income.
B) half of its realised capital gains, and interest and dividend income.
C) all of its realised capital gains, and at least 50 percent of its interest and dividend income.
D) none of its realised capital gains, but all of its interest and dividend income.

Question 16

Ashley believes that the price of gas and oil is about to rise and energy company profits will follow. She should invest in

A) an asset allocation fund.
B) a sector fund.
C) an aggressive growth fund.
D) an emerging market fund.

Question 17

One characteristic of bond funds is the

A) requirement of a minimum initial investment of $5,000 or more.
B) fluctuation in value in response to changing interest rates.
C) high anticipated short- term growth potential.
D) extremely aggressive trading approach.

Question 18

Nearly all managed funds operate as regulated investment companies. This means that

A) portfolio decisions are mandated by government authorities.
B) they do not pay taxes on their income.
C) their investments are guaranteed by the ASIC.
D) they are no fees funds.

Question 19

Managed fund investors are primarily exposed to and risks.

A) market; inflation
B) business; financial
C) business; inflation
D) market; financial

Question 20

Automatic reinvestment plans

A) are a good way to avoid taxes on dividends and capital gains.
B) do not allow for the purchase of fractional shares.
C) are an excellent way to accumulate wealth through disciplined investing.
D) may involve exceptionally high transaction fees.

Question 21

The net tangible assets value is the price per unit an investor will pay to acquire units in an unlisted fund.

Question 22

The purchase price of a listed managed fund is equivalent to the net tangible assets of the fund.

Question 23

Managed funds provide a simplified means of diversifying a portfolio.

Question 24

Which one of the following statements is correct concerning international funds?

A) Balance- of- trade positions do NOT affect the rate of return from an Australian perspective.
B) Technically, global funds can only invest in foreign securities.
C) International funds are considered low- risk investments.
D) A devaluation of the dollar causes returns on foreign investments to improve from an Australian perspective.

Question 25

Information for ABC Fund is $$\begin{array} { l c c } \hline & \text { Beginning of the Year } & \text { End of the Year } \\\hline \text { NTA } & \$ 12.80 & \$ 11.64 \\\text { Market price of the fund shares } & \$ 13.05 & \$ 9.95 \\\text { Dividends paid over the year } & & \$ 0.90 \\\text { Capital gains distributed over the year } & & \$ 0.30 \\\hline\end{array}$$ The market- based holding period return for ABC Fund is

A) - 14.6%.
B) - 19.1%.
C) 0.3%.
D) 9.4%.

Question 26

Risk- seeking investors seeking maximum capital appreciation with little, if any current income, should invest in

A) equity- income funds.
B) value funds.
C) aggressive growth funds.
D) growth funds.

Question 27

Investors purchase units in an unlisted managed fund directly from the fund.

Question 28

The ability to automatically buy additional fund units using the dividend income generated by the fund is called a(n)

A) automatic reinvestment plan.
B) conversion plan.
C) systematic withdrawal plan.
D) automatic investment plan.

Question 29

The net tangible asset value of a managed fund increased from $12.03 to $13.53, but its price per unit increased by only $1.26. This information indicates that the fund

A) is a listed fund.
B) is an unlisted fund.
C) paid out $1 in dividends.
D) paid out $1 in capital gains.

Question 30

Investors are generally well advised to avoid managed funds with

A) highly rated fund managers.
B) good performance in both up and down markets.
C) low fees and high tax efficiency.
D) consistently poor historical performance.

Question 31

Which one of the following statements concerning managed funds is correct?

A) Managed funds are generally highly concentrated portfolios.
B) The selection of individual securities remains with the managed fund investor.
C) The managed fund industry is the largest financial intermediary in the United States.
D) Managed funds were first created in the 1980s.

Question 32

One characteristic of most index funds is that such funds typically

A) are designed to "beat the market."
B) charge high entry fees.
C) produce a large dollar amount of realised capital gains every year.
D) have a very low- cost structure with respect to management fees and transaction fees.

Question 33

Like ordinary shares, exchange traded funds (ETFs) can be sold short.

Question 34

Socially responsible funds are distinguished from other managed funds because they

A) will sell their shares only to investors who sign a statement saying they do not smoke tobacco or use alcohol.
B) invest only in companies that meet specified moral, ethical, or environmental standards.
C) invest only in over- the- counter shares.
D) do not charge any sales commission or management fees.

Question 35

Exit fees

A) are charged if an investor sells his or her shares within the first few years.
B) are charged when an investor buys their mutual fund shares.
C) were designed to help no- load funds cover their marketing expenses.
D) encourage short- term trading.

Question 36

Investors should never use managed funds to invest in areas where they would not buy individual shares.

Question 37

Listed funds are

A) purchased directly from the funds' manager.
B) traded at NTA.
C) less liquid than unlisted funds.
D) best purchased when they are selling at a premium.

Question 38

Socially responsible funds tend to underperform the market.

Question 39

One advantage gained by investing in a bond fund rather than in individual bonds is the

A) ability to earn fully compounded rates of return.
B) guarantee that the bonds will be held to maturity to avoid market fluctuations.
C) government guarantee protecting the bond principal.
D) ability to earn a capital gain.

Question 40

An unlisted investment company

A) sells shares at a discounted NTA price.
B) is involved in all trades of its shares.
C) trades like a share on the exchanges.
D) has a set number of shares.

Question 41

Most exchange- traded funds are index funds.

Question 42

Funds that consistently earn above average rates of return also tend to charge higher sales commissions.

Question 43

The managed fund, and not the investor, is responsible for all income taxes on capital gains and dividends earned by the fund.

Question 44

The longer you intend to hold a fund, the more willing you should be to accept an entry fee in exchange for lower annual management fee.

Question 45

Both the performance of the overall share market as well as the skills of the managed fund manager affect the performance of a managed fund.

Question 46

IPOs for listed funds are priced at NTA.

Question 47

Index funds merely attempt to match the performance of some benchmark, not to outperform it.

Question 48

The conversion privilege offered by many managed funds enables investors, within three days, to convert their shares back to cash in an amount equal to the original cost of the investment.

Question 49

The discount or premium on a listed managed fund can be as much as 25 percent.

Question 50

Listed funds are required to provide a prospectus to all new shareholders as long as the fund is trading at a premium.

Question 51

The maximum average maturity of the holdings within a money market account must be 6 months or less.

Question 52

Managed funds tend to outperform the market.

Question 53

Managed fund fees are disclosed in the fund prospectus.

Question 54

Trading in listed investment companies is done between investors in the open market.

Question 55

When an investor buys shares in a managed fund, he or she becomes a part owner of a portfolio of securities.

Question 56

To participate in an automatic investment plan, investors must allow the investment company to have access to a bank account or their paycheck.

Question 57

Much of the success of a managed fund depends on the investment skills of the fund manager.

Question 58

As a general rule, the time to buy a listed managed fund is when the fund's premium is approximately 5 percent higher than its past average.

Question 59

Holding period returns are normally used only for investment periods of one year or less.

Question 60

The primary objective of growth managed funds is capital appreciation with a high level of current income.

Question 61

Automatic investment plans makes it easier for investors to save money.

Question 62

Managed funds are used extensively as retirement investments.

Question 63

What are the primary disadvantages of owning managed fund units?

Question 64

Every managed fund has a stated investment objective. Disclosure of the investment objective is required by the ASIC, and is used to classify a managed fund into one of several categories. Briefly explain the investment objective of each of the following categories.
a() Growth funds.
b() Aggressive growth funds.
c() Equity- income funds.
d() Balanced funds.

Question 65

What are some of the advantages of investing through managed funds? Name at least three.

Question 66

The portfolio manager for a managed fund physically safeguards the securities being bought and sold by that firm.

Question 67

Managed funds can carry a number of different types of sales charges and fees. Briefly explain the following such expenses.
a() An entry fee.
b() An exit fee.

Question 68

Explain why listed funds can sell at prices other than the fund's NTA.

Question 69

A listed fund with an NTA of $9.60 and a market price of $10.25 is selling at a premium of 6.8%.

Question 70

A listed fund is selling at a premium when the NTA exceeds the market price.

Question 71

Investors should select managed funds that match their personal investment goals and provide the services they desire.

Question 72

Both realised and unrealised capital gains from managed fund investments are currently taxable for individual income tax purposes.