The CII AF4 April 2019 Exam in Review

It’s now time for us to turn our attention to the April 2019 CII AF4 exam. The following will be useful reading for those preparing to sit AF4 in the near future.

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

Question 1

The Section A question focused on a client who had inherited £230,000 and was looking to invest it for the long term. We were told the adviser was planning a portfolio of UK equities and UK corporate bond funds only and considering strategic or tactical asset allocation using passive and active funds.  We were also given a table detailing three property funds held in an ETF, a REIT and an OEIC.

The exam started gently with a fact-finding question in order to establish the client’s investment needs.  This was a nice start to an investment exam.  It continued with questions on ratios: the purpose (and calculation) of the information ratio and the reasons why the REIT may have achieved the highest information ratio.  Ratios are usually tested, so we feel candidates would have been well prepared for this type of question.

The exam continued with questions on the products: the reasons why the OEIC has a higher level of cash (as told in the case study), the effects of the higher level of cash, four ways in which an open-ended structure (and a closed-ended fund structure) could respond to a liquidity crisis following substantial redemption requests.  (With all the Woodford attention that followed, this question seems very apt now!)

We then had theory question: the inputs needed to produce an efficient frontier curve, explanation of how it’s used in planning and the limitations of using it.  Candidates were also tested on the weak form of EMH.  Again, these seemed like fair questions to ask at this level.

Onto the home front, and the question concluded with the differences between strategic and tactical asset allocation and yield curves.

Question 2

The second question started with more theory questions: the benefits of using the CAPM and a calculation and theory question on beta.  It continued with a question on the fees included within the OCF figure and four other costs that might be paid in the fund.  We then had questions covering modified duration and credit quality.  Finally, this question ended with a test on the methods of tracking an equity ETF and a factors question (seen commonly now in the AF exams – here’s an article about how to approach this type of question) with candidates having to state the factors to consider when deciding whether to invest in OEICs or ETFs.

Question 3

The third question was very short and to the point. It comprised two tables of information: the first one on an investment trust and the second on an aviation company.  There were a lot of calculation questions for this question; with the investment trust candidates had to calculate:

• the undiluted net asset value per share and its discount/premium
• the diluted net asset value per share
• the net gearing ratio

With the Aviation company candidates had to calculate:

• earnings per share
• dividend cover

The other questions were around exercising a warrant, consequences of an increase in borrowings, deep value investment strategy and the main risks specific to the aviation company.

The paper covered a lot of subjects and calculations, but overall we feel it was a well-balanced and manageable paper for someone who had studied properly.

Comparison to the October 2018 Exam

Let’s compare this paper to the one sat in October 2018.

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

This paper tested the following areas:

• Main factors an adviser would take into account when constructing a portfolio
• Qualifying conditions for a property fund to qualify as a PAIF and tax treatment
• EPS and dividend cover
• Risk
• Re-balancing process and the main issues an adviser should consider
• Subscription rules and tax treatment of an EIS
• MWR – calculation and theory
• SRI
• Alpha and Sharpe ratio calculations
• APS for an ISA
• Qualifying investments for an Innovative Finance ISA
• Preference shares
• Standard deviation calculation
• Beta
• Interest rates, inflation and deficits in the current account/capital account

As with all AF exams, it’s vital to study past papers to get a firm grip on the type of questions that have been asked as well as to practise some of the more commonly asked calculations. To give the best chance of success, candidates should prepare a detailed plan of study that covers the relevant theory, calculations and products.

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!