The CII AF4 April 2018 Exam in Review

The CII AF4 exam paper from the April sitting looks, on first sight, as a challenging exam.  AF4 usually is, but this time, it appears to have elements of AF2 in there as well. The following will be useful reading for those preparing to sit the CII AF4 exam.

If you haven’t seen the paper, you can find it here.

Question 1

The big Section A question introduced us to a basic rate taxpayer, who had invested a substantial amount in a fund of funds unit trust, but is disappointed with performance.

The questions started with a familiar AF4 question asking for the percentage change in the value of his holding, the current value of his holding, the CGT liability if he were to sell and to finish, Question (a) comment on specific parts of the asset allocation.  It didn’t seem like a bad start for someone who had studied AF4 past papers well.

It continued with more calculations: the Sharpe ratio, the Alpha and an explanation of the significance of these figures. Then, we had questions on the differences between UCITS and UCIS and the 5 types of investor to whom UCIS may be promoted.  This is information readily available in both R02 and J10, so students should have been pleased with this question for 13 marks.

It continued with more UCITS regulations regarding diversification and borrowing.  On the home straight and Question 1 finished with explanations of fettered and unfettered funds and advantages of each and finally how a manager of managers fund operates with advantages and disadvantages.  Compared with some past first questions, this one didn’t seem too bad.

Question 2

Question 2 was very focused; this time the client is Atique whose father had recently died leaving him in an inheritance of cash and gold.  What strikes us as unusual is that practically all the questions that make up Question 2 are on the gold investment in one guise or another.

So it starts, for 10 marks, with the benefits and the drawbacks of holding gold coins in a portfolio; then we are asked for the difference between a physical gold ETC and a synthetic gold ETC with a 6-mark question part asking for an explanation of why the price of a synthetic gold ETC would differ from the gold spot price.

The question continued with the use of futures contracts to hedge the holding, a calculation of the cost of hedging using a 3-months contract, an explanation of why this might not be the best way to hedge his position and finally, 5 other types of derivative or instrument that could be used to hedge exposure.

Question 3

Finally, onto Question 3 and quite a brief case study on Pramesh, who holds company shares in a technology company, where we are given various pieces of financial information in table format.

The questions here reminded us of an AF2 paper, as it covered calculations on return on equity, return on capital employed and the interest paid as a percentage of gross profit.

Candidates then had to explain the impact borrowings have had on returns and the reasons, the main drawbacks in using price to book (P/B) when valuing a company and finally a question for 13 marks on behavioural finance.

All in all, it was a varied paper, with some areas we feel have not been overly tested.

Comparison to the October 2017 Exam

So, how does this paper compare with last October’s paper?

If you haven’t seen it, you can find it here.

The Section A question introduced us to a client considering a multi-strategy macro hedge fund, where one of the fund’s strategies is based on the fact that inflation in the UK will go up, and the Bank of England will raise interest rates. The first question was, therefore, on why the Bank of England may not raise interest rates, even if inflation is over their target (and continued further on with the possible drawbacks of his investing in this type of fund).

The calculations were what the fund would be worth after charges; information ratio for an ETF; annualised returns and discount to NAV on a shareholding.  The rest of the 80 marks were around explanations of what the information ratio measures, the purpose of using a benchmark, the main criticisms of CAPM and changes in VCT legislation.

The two 40-mark questions in Section B concerned two companies with two tables of their accounting details.  More calculations followed with operating profit margin, revenue per employee and an explanation of why this is important for analysis and a comment required on the trend for operating profit margin and revenue.  Candidates also had to calculate dividend yield and earnings per share.

Question 3 had just two paragraphs of information and involved a recently retired father investing in fixed interest with an interest in commercial property and his daughter hoping to buy her first home.  There were questions on the LISA, a ‘factor’ question in relation to the underlying investments that determine the return on a commercial property fund, the risks of REITs and an OEIC investing in property and an explanation of why property investment may protect him in a climate of rising inflation compared to a portfolio of fixed interest bonds.

All the topics tested are covered in the J10 manual (Discretionary Investment Management); although, it is also necessary, with this exam, to keep up to date with the current economic climate too. For most advisers, this would form part of their normal day, so shouldn’t cause problems.

Anyone planning for October’s exam needs to study past papers; these help with the format of the exam and the style of question and can help focus on some of the technical detail that has been tested before. A detailed study plan should be followed, as this exam is not easy and students need to give themselves plenty of time to ensure they understand the various investment products, the theory of investment, as well as the many calculations that can come up.

Grab the resources you need!

If you’re studying for your CII AF4 exam, and you’re wanting some extra practice, grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the AF4 mock paper taster now!