The CII AF4 March 2024 Exam in Review

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

This article is correct as at 21 May 2024.

You can find the exam guide here.  

Section A 

Question 1

The first question in this AF4 session introduced us to Tadeusz, a higher-rate taxpayer with a high attitude to risk with an objective for long-term capital growth.

Details of a global equities OEIC were given in a table which showed a 12-month return of -27% with the reasons given for this result as changes in globalisation and declining GDP.

The exam started very nicely with candidates having to outline nine factors that the adviser would take into consideration when conducting the annual review for Tadeusz.

Next, a description of beta was required along with a calculation and the limitations of using beta as a risk measurement.  Again, this was standard AF4 content that should have given candidates no problems.

The next question was just for three marks and asked for the main differences between GAARP (growth at a reasonable price) and growth investing.

Next, for six marks, there was a question that simply asked for two risk-adjusted ratios used to analyse an actively-managed fund.  The question asked for alpha to be excluded so should have directed candidates very easily towards the Sharpe ratio and Information ratio.

The next question was in two parts: firstly, the main rules that a fund must adhere to in order to qualify as a REIT, and in part (ii), the two types of income payment that can be made by a REIT.  Interestingly, this collective property investment also featured in the AF1 exam in February for a similar number of marks.

To finish this question, candidates had to answer questions on the benefits of introducing commercial property to the asset allocation of the GIA portfolio; four main risks when investing in commercial property through an OEIC; four main assumptions used in portfolio optimisation; the objective and drawbacks of Stochastic modelling; and finally, what GDP measures and a brief explanation of globalisation.

This seemed like a very fair 80-mark AF4 question covering some standard concepts within investment planning.

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Section B

Question 2 

The next question introduced us to a married couple in their 40s with two teenage children.  Another table of information was provided; this time on  the ISAs that the parents held as well as the 17-year-old son.  The two children also had friendly society policies.

Firstly, there was a calculation; candidates had to calculate the total additional amount that the family could pay into all eligible ISA products in the tax year.  This was a dream of a question and should have been nine very easy marks, not usually seen within the AF4 exam.

Candidates then had to explain the tax treatment of friendly society policies and again calculate the total additional amount that the children could pay into their policies. This may have not been so easy as friendly society policies are not necessarily something candidates may be bumping into too often in their day jobs, but hopefully, the tax treatment would have been more straightforward than the extra amounts that the children can pay.

The third question asked for the benefits of investing in a frontier markets equities fund compared to holding direct UK equities; the main stages of the top-down investment process and the main investment-related factors that the couple would take into consideration when deciding whether to choose active or passive strategies for the investment into a collective fund.  This was a mix of subjects that have been tested before such as passive vs active and the top-down investment process.  If any candidates were unsure as to what a frontier market is, then knowledge and experience could have been drawn on to come up with benefits such as diversification, reduction in non-systematic risk, professional management, and investor protection to achieve many of the marks on offer.

The last question asked for the main benefits and drawbacks of using a stocks and shares ISA as a long-term retirement savings vehicle compared to a personal pension.

Overall, this was a straightforward Question 2, and well-prepared candidates should have performed well.

Question 3 

Finally, onto Question 3, where we met Naomi, the adviser, who was meeting an existing client of an accountancy practice that the adviser firm had an association with.

We were told that Kambiz sold his business and was looking for investments to mitigate his tax liability.

A table showed us details of an investment trust where Kambiz held both warrants and convertible loan stock.

The questions started with three ways an investment trust can raise capital.  Every candidate should have known that gearing is an option as well as issuing bonds so should have scored the majority of the marks available.

Candidates then had to tackle dilution: firstly, a description of the concept, then a calculation of the diluted NAV per share, and then an explanation of the difference in the diluted NAV and the undiluted NAV.  This is well covered within the supporting textbooks so the well-prepared candidate should have done reasonably well in this question.

The next question asked for the time limits for reinvestment into an EIS to get deferral relief on the Capital Gains Tax and another calculation of the maximum that could be invested into an EIS.

The exam finished as it started with a question that should have proved little to no difficulty.  Candidates had to outline the main differences between the tax treatment of an EIS and a VCT and also state three main benefits and drawbacks of investing into an EIS portfolio compared to a single company EIS.

Overall, this seemed a very reasonable paper, which covered some easier areas than is often expected within the AF4 exam.  The calculations were in the main straightforward and many of the questions covered frequently tested areas.

Comparison with the October 2023 Exam Paper 

Let’s look at what was tested in October 2023’s paper. This question paper can be found here. 

The topics covered were: 

• the aim, and key assumptions, of Modern Portfolio Theory
• the main benefits of diversification
• standard deviation – both a description and a calculation
• risks within existing investments held
• differences between CPI/RPI and broad/narrow money
• economic consequences of an increase in the UK money supply
• return of equity – calculation and drawbacks
• attitude to risk and capacity for loss
• behavioural finance
• stocks and shares ISA vs EIS
• alpha calculation
• investment trust – gearing and discounts
• income options on a platform cash account
• tactical vs strategic asset allocation
• sequencing risk
• redemption yield on gilts
• benefits of gilt-based collectives vs direct holdings
• inflation and index-linked gilts/interest rates and conventional fixed-interest
• quantitative tightening and yield curves
• investor protection

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!