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Other Managed Products - Coggle Diagram
Other Managed Products
Segregated Funds
Regulation
regulated by provincial insurance regulators; CLHIA (canada life & health insurance association) = each province uses its guidelines as main standard; OSFI (office of superintendent of financial institutions = ensures federally regulated insurers have enough capital); provincial insurance regulators = oversee insurer conduct in provinces
assuris protection = if insurance comp goes bankrupt assuris steps in (CDIC for insurance); 100% of benefit covered until $60k or 85% of promised benefit which is greater
Structure
4 main parties involved = insurer (insurance comp issuing insurance); contract holder (investor person who buys and owns the contract); annuitant (person whose life the contract is based on can be the same as holder); beneficiary (person who receives the funds upon annuitants death)
if held inside RRSP = holder & annuitant must be the same person; if held outside RRSP = they can be diff
Features
maturity guarantee = must guarantee atleast 75% of og investment after 10 yrs; some give 100% guarantee but MERs is high or lock in period is about 15 yrs; ex if you invest $100k with a 75% guarantee then after 10 yrs even if market drops you will get 75k; investor can wd before maturity but guarantee would be lost
death benefit guarantee = if investor dies before maturity beneficiary gets either market value or guaranteed amount (75-100%) whatever is greater; ex michael is guaranteed 10k if after his death fund value is 8k then bene gets 8k+2k=10k; if fund value is 10k then bene gets 10k; if fund value is 12k then bene gets 12k; bene always receives at least guaranteed income or more
age restrictions = younger investors 100% death guarantee but seniors are riskier can die before market recovers so only 75% guarantee or may not even sometimes qualify
reset dates = lets investors reset guarantee to lock in gains (once per yr or sometimes daily); when you reset - new higher market value becomes your new guaranteed amount but the 10 yr maturity period restarts; ex lulu invested 50k the fund is now 80k if she resets then new guaranteed amt is 80k but the new 10 yr period starts from today; frequent resets can delay maturity
creditor protection = regular investments like MFs are not creditor proof (if you go bankrupt creditors can claim them) but seg funds are creditor proof if they are made in good faith (not to hide money) & there is a named beneficiary; ex gerald moves all money into seg funds just before filing bankruptcy so he will not be protected (done in bad faith) but if it was invested long before, with named beneficiary then it is protected
bypass probate = probate is legal process of validating a will but is costly & tedious ; seg funds allow direct payouts to bene avoiding probates; only bypass probate if theres a named bene other than estate; RRSPs RRIFs and life insurance policies bypass probate; MFs dont; quick private tax efficient transfer to heirs
cost of guarantees = seg funds charge higher than MFs to cover insurance guarantees MF MER is 2% but seg funds MER is 2.75; extra 0.75% can reduce long term growth so investor must decide if protection is worth the cost
seg fund investors (risk averse, wants guarantee, self employed, creditor protection, bypass probate, concerned about leaving money to fam safely)
Taxation
taxation of seg funds = like MFs ,seg funds can have capital gains or cap losses; ex if seg funds has 250k gains & 120k losses then net cap gain is 130k which is taxable to investors; if seg funds has more losses than gains it can distribute it to investors to offset other gains and reduce overall taxes; MFs can only carry forward losses cant distribute; ex charlie invested in fund a got 5k net cap loss; he also had 12k gains from other investments; he can offset 12k-5k=7k taxable gain; seg funds can reduce overall tax bill
allocations vs distributions = when MFs distributes you get cash; NAVPS falls because cash leaves fund; in seg funds it makes allocations so you get paper entry not actual cash; NAVPS does fall
tax treatment of guarantees = when seg funds guarantees your capital and insurer tops up value bec market went down that guarantee payout is not taxable as gain; ex jonah invests 100k; @ maturity fund value 90k; insurer tops up 10k to make it 100k; extra 10k topped up is not taxable
spousal rollover = if spouse is named successor owner, seg fund can transfer to spouse upon death @ adjusted cost base & no immediate tax is triggered; cap gains tax applies only when spouse later sells or dies
segregated funds = MF + insurance; invest money in market but also comes with insurance; sold as insurance contracts while the comp themselves have assets; investor is contract holder; ex michael invests $250/month in MF died after 1 month sarah only gets $250 but if he had life insurance policy with $1m death benefit sarah would get $1m
Facts = structured as insurance contracts; maturity + death benefit guarantees; creditor protection; ability to bypass probate; investor owns contracts not units; can issue notional units
Closed End Funds
Structure
issues fixed no of shares at start; after launch units trade on exchange (like stocks); company doesnt redeem units - investors sell them to each other; units prices based on NAVPS / demand supply / investor sentiment
market price may be above / below NAVPS; most closed end funds trade below NAV bec theyre less liq; big disc = poor recent perf, change in manager, neg market sentiment (larger disc more attractive to new investors)
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Income Trusts
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Business Trusts
represent ownership in operating companies with steady mature earnings; pay out cash flow to unitholders; face market and eco risks similar to stocks
ideal for steady income not rapid growth; usually good for stable comps not startups (as they reinvest profits for growth)
structured as trusts not corps; pool investors money to buy income producing assets (buildings or stable businesses); units trade on exchange; value changes with interest rates, asset perf, market conditions; behvae somewhat like fixed income secs (sensitive to rates) but eq like risks bec income depends on business perf
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taxation
reit = tax pass through (avoid paying corp income tax by distributing nearly all income directly to unitholders)
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Listed Private Equity
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PE = buying ownership or lending directly to comp not publicly traded; raise money from investors (to buy comps; help new firms grow; turn around struggling firms); PE firms themselves listed on exchange as 'listed PE' so that retail investors can buy shares of PE firm & share in its profits
types = leveraged buyouts (borrowing money to buy another comp - most common); growth capital (funding expansion of young comp); turnaround (investing money to save struggling firm); early stage venture capital (funding brand new startups); late stage venture capital (funding established firms not yet profitbale); distressed debt (buying debt of troubled comp at a discount & profiting if comp recovers)
listed PE = earlier was restricted only to super wealthy; listed on exchanges to gain access to capital, increase transparency, provide liq to investors
investors profits = capital gains (when PE firms sells comps for profit); divs or distributions (from profits earned by portf comps); price appreciation (PE firms shares gain value)