The CII AF4 October 2018 Exam in Review

It’s now time for us to turn our attention to the October 2018 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 big Section A question introduced us to Gavin and Sasha, who had recently sold their business for £1.6m.  They had various investments but wanted to use the proceeds of their business to generate a net income of £100,000 per annum.

The exam started with an advice question on the main factors an adviser would take into account when constructing an investment portfolio for the couple.  That was a very nice start.

The exam continued with the main conditions that must be met for a property fund to qualify as a PAIF, along with the tax treatment of the three income components of a PAIF.  This question was worth overall 14 marks, and some delegates may have struggled if they were not familiar with PAIFs.

The exam continued with some well-trodden calculations: EPS and dividend cover.  These have been tested numerous times in the past, so candidates really should have been prepared.

Risk was the topic for Question (d), and again this should not have caused delegates problems.  Similarly (e) tested re-balancing: the process as well as the main issues an adviser should consider when re-balancing a portfolio.

Question (f) covered subscription rules and the tax treatment of an EIS; there were 10 marks on offer and we feel confident that most candidates would have picked up most if not all of these.

Finally Question 1 tested money-weighted returns, and there were 10 marks for a calculation and 4 marks to answer why the MWR is not considered appropriate when evaluating and comparing different portfolio returns.

Overall, we didn’t think this was a bad Question 1.

Question 2

Onto Question 2 and this covered a wide variety of topics, starting with socially responsible investing.  It continued with two more classic calculations –  this time the Alpha and Sharpe ratio – two other formulas that AF4 candidates should have had up their sleeves.  We also had questions on the APS (the additional permitted subscription) for an ISA as well as the qualifying investments that can be held in an Innovative Finance ISA; both these areas we suspect haven’t been tested before.

The last question was in four parts, and each one tested an aspect of preference shares for a total of 11 marks.

Question 3

Finally Question 3, it started with a 10-mark calculation of standard deviation and continued with theory questions on the difference between standard deviation and Beta and what Beta means for one of the funds in the case study in terms of return.

It continued with questions on interest rates, rising inflation, the current account and the capital account with the potential economic consequence of both being in deficit over the medium to long term.

This last question may have been the toughest; although, any AF4 candidate should be paying close attention to markets generally and appreciate how inflation and interest rates impact on different asset classes.

Comparison to the April 2018 Exam

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

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

This exam tested the following topics:

• The percentage change in the value of a holding / the CGT liability
• Sharpe ratio and Alpha and an explanation of the significance of these figures
• The differences between UCITS and UCIS and the 5 types of investor to whom UCIS may be promoted.
• UCITS regulations regarding diversification and borrowing
• Fettered and unfettered funds and the advantages of each
• How a manager of managers fund operates with advantages and disadvantages.
• The benefits and drawbacks of holding gold coins in a portfolio
• The difference between a physical gold ETC and a synthetic gold ETC
• Why the price of a synthetic gold ETC would differ from the gold spot price
• The use of futures contracts to hedge a holding
• Calculation of the cost of hedging using a 3-months contract
• 5 other types of derivative or instrument that could be used to hedge exposure
• Calculations on return on equity, return on capital employed and the interest paid as a percentage of gross profit
• The impact borrowings have had on returns and the reasons, the main drawbacks in using price to book (P/B) when valuing a company
• Behavioural finance

Anyone planning for April’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!