December 2017 Examination

Private Client Investment Ad vice

and Management
Date of exam Thursday 7 December 2017

3 hours 10.00 am – 1.00 pm

Rubric Section A – answer all questions in this section

Section B – answer one question in this section

Section C – answer all parts of the question in this section

Candidates are reminded that no marks will be awarded for illegible work

Notes to candidates

1. Please insert your candidate number on the cover of your answer book. Do not
insert your name.

2. Show all workings in your answer book.

3. Candidates may attempt the sections in any order. Please indicate clearly in your
answer book which questions you are answering.

4. Please insert in the box provided on the cover of your answer book the numbers of
the questions you have attempted in the order in which they appear in the answer
book.

5. You may use the calculator provided or a model approved by the CISI.

6. You must hand your answer book to an invigilator before you leave the examination
hall. Failure to do so will result in disqualification.

7. Once submitted, the examination scripts become the property of the CISI and will
not be returned to candidates.

Please turn over when instructed

Section A Total 40 Marks

Answer all questions in this section.

1 a) State the THREE main attributes that the FCA considers in regard to the ‘fit and
proper’ test for an individual. (3 marks)

b) Give TWO examples of the FCA’s Controlled Functions. (1 mark)

2 a) Provide TWO reasons why Convertible Bonds may be issued by a company.

(2 marks)

b) Company XYZ issued a 5% convertible unsecured loan stock, redeemable in

December 2022. The conversion ratio is 25 Ordinary Shares per £100 nominal of
loan stock. The market price of the convertible is £65. The Ordinary share price is
75p. The dividend per share is 0.2p. The conversion rights expire in March 2018.
(i) Calculate the conversion price. (1 mark)
(ii) Briefly comment on the credit risk of the company in this scenario. (1 mark)

3 David is domiciled and resident in the UK. In the 2017 / 2018 tax year he is
expected to earn £45,000 as a PAYE salary and £25,000 in taxable UK dividends.
He has no other income. Calculate his income tax liability for the 2017 / 2018 tax
year. (4 marks)

4 Name and briefly explain FOUR risks which are associated with investing in
Emerging Markets. (4 marks)

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5 Briefly explain the following terms when a company is trying to raise new
capital:
a) Offer for Sale (1 mark)
b) Fixed Price Offer (1 mark)
c) Tender Offer (1 mark)
d) Offer for Subscription (1 mark)

6 When a trustee is exercising their power of investment, state and briefly explain
FOUR of the standard investment criteria that they should adhere to as set out in
the Trustee Act 2000. (4 marks)

7 Briefly explain the following terms when researching income and protection
products for a client:
a) Purchased Life Annuity (1 mark)
b) Private Medical Insurance (1 mark)
c) Critical Illness Cover (1 mark)
d) Income Protection Insurance (Long Term) (1 mark)

8 Paul invested £100,000 into a unit trust at the start of the year. After six months the
value of the units was £80,000 and at that point he withdrew £15,000. At the end of
the same year his total holding in the unit trust was valued at £125,000. Over the
same year the relevant index rose by 5%.

a) Calculate the money-weighted rate of return on the portfolio. (1 mark)

b) Calculate the time-weighted rate of return on the portfolio. (1 mark)
c) Comment on the performance of Paul’s investment strategy AND on the
performance of the unit trust manager. (2 marks)

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9 Briefly explain the following terms when analysing a company:
a) Dividend Cover (1 mark)
b) Price/Earnings Ratio (1 mark)
c) Price/Book Ratio (1 mark)
d) Earnings Yield (1 mark)

10 In November 2017 Alison wrote 100 traded option contracts in ABC plc 110p
January 2018 Call for a premium of 5p per share. She also wrote 100 contracts in
ABC plc 100p January 2018 Put for a premium of 4p per share. The price of ABC
shares at the time was 108p.

a) Calculate the intrinsic value and time value for both the Call and Put options.
(1 mark)
b) Calculate the overall gain or loss of the contracts if the share price rose to 120p
just before expiry of the contracts (ignore expenses). (2 marks)
c) Comment on the rationale of the strategy adopted. (1 mark)

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Section B Total 20 Marks
Answer one question in this section.

Question 11

Discuss the strengths and weaknesses of investing into an Ethical Portfolio. (20 marks)

Question 12

“The constituents of global bond indices should worry passive investors and excite
those marketing active funds.”

Within this context, discuss the strengths and weaknesses of investing into active and
passive bond funds in current times. (20 marks)

Question 13

Discuss and analyse the use of the Capital Asset Pricing Model (CAPM) when
constructing a portfolio and how the model was perceived to perform during the Global
Financial Crisis. (20 marks)

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Section C Total 40 Marks
Answer all parts of the question in this section.
Question 14
Bill is aged 71 and married to Hillary, aged 69. They are both retired from their florist
business, although they have still retained some of their shareholdings. They have two
children, Andrew and Chelsea. Andrew has one child, aged 12 and Chelsea has two
children, aged 7 and 10.

Bill and Hillary live in their main home in the Cotswolds and the value of the property is
£1.5 million. They have no mortgage. Bill and Hillary are retired and they live off the
income from their pension and their shareholdings in the florist business.

Income
Bill Hillary
Pension Income £13,000 £17,000
Income from Shares £8,000 £8,000
Total Income £21,000 £25,000

The company is an unquoted Private Limited Company and Bill and Hillary’s shares are
valued at £62,500 each. When they retired, 10 years ago, they each had a Self Invested
Personal Pension (SIPP) from which they took 25% of funds as Pension
Commencement Lump Sums which they used for an around the world cruise. They
used part of their remaining SIPP funds to purchase annuities and left the balance of
these invested. Bill and Hillary have confessed that although they used to be very active
in the stock market and were keen investors, they now have other interests and have
left the SIPPs to ‘gather dust’.

Bill and Hillary have decided that they are no longer risk taking investors and would
prefer less volatility with a safer portfolio which grows steadily each year. They would
also like to increase their income so that they can start to give their grandchildren some
money each year.

The remaining SIPPs have a combined value of £425,000 and are held as Execution
Only portfolios with an online pension provider. They generate around 2.0% income per
year and this income simply accumulates as cash within each SIPP. The existing SIPP
portfolios consist of the following assets:
Amount % of Funds
Equities
Invested (£) Invested
Bellway £18,000 4.2%
Close Brothers Group £27,000 6.3%
Computacenter £22,500 5.3%
GlaxoSmithKline £36,000 8.5%
RBS £13,500 3.2%
Anglo American £36,000 8.5%
RDSB £31,500 7.4%
Apple Inc £54,000 12.7%
ABC Fund Managers - Emerging Markets Equity Index £63,000 14.8%
XYZ Fund Managers - Japanese Investment Trust £58,500 13.8%
Cash £65,000 15.3%
TOTAL £425,000 100%

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Bill and Hillary hold a small cash current account of £10,000 which is held in joint
names. When their children married they were each gifted £10,000 – to Andrew in
January 2014 and Chelsea in September 2015. They have recently set up a will, leaving
their assets to each other on first death and to both Andrew and Chelsea in equal
amounts on second death, except for a donation to their local church of £250,000.

They are now keen to arrange their finances with proper financial advice and have
visited an adviser, Simon, who is very bullish about the future of global equity markets.
He has recommended the following portfolio structure:

UK Bonds 5%
Global Bonds 15%
UK Equities 45%
Global Equities 25%
Absolute Return Funds 8%
Cash 2%

a) Calculate Bill and Hillary’s IHT position assuming that Bill died three months ago and
Hillary died today. Also assume that neither Bill or Hillary signed an expression of
wishes for the SIPPs. (8 marks)

b) It comes to light that Bill and Hillary have been helping to pay for their
grandchildren’s school fees and have paid out a total of £15,000 per annum (total
£60,000) since 2013. Briefly explain how this will affect the IHT calculation.
(2 marks)

c) Critically analyse the structure of their current SIPPs from an investment

management point of view, with respect to their current plans. (10 marks)

d) Critically analyse the strengths and weaknesses of Simon’s recommendations.

(10 marks)

e) Discuss the advantages and disadvantages of vehicles Bill and Hillary could use to
set up savings for their grandchildren. (10 marks)
(Total 40 marks)

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© Chartered Institute for Securities & Investment 2017.

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