The CII AF4 October 2019 Exam in Review

It’s now time for us to turn our attention to the October 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 carries 80 marks, and there was a return to performance calculations as well as various other technical topics.  The question focused on Nicolas and Alessandra, who had inherited the sum of £200,000.  They both had an ISA; Nicolas’ was invested in a multi-asset fund, and a table of one-year performance figures were given.  Question (a) asked for three calculations: the overall benchmark return, the overall performance of his fund and the fund’s alpha, and additional information was given to calculate this.  In amongst the calculations was also a question on the asset class that had made the greatest impact on performance of his portfolio relative to the benchmark.  This type of question had disappeared for a while from AF4 papers, so for some it would have been a welcome return, especially for those who had studied old exam guides.

The exam then continued with an easy question on the benefits and drawbacks of using stocks and shares ISA as a long-term investment compared with a pension.

The third question was another calculation and perhaps an area not overly tested before; candidates were given a table of potential investments, the method of purchase and the investment amount; candidates had to calculate the total costs and levies payable on the transactions.  The question was for eight marks and should not have caused too many issues for candidates.

Question (d) was explaining the diversification rules for a retail UCITS OEIC and the maximum exposure in unlisted securities.

Question (e) was a three-part question on ATR: firstly an explanation was required on ‘capacity for loss’, secondly the non-financial factors that can influence ATR and finally why Nicolas’ ATR may be higher for a personal pension compared to a stocks and shares ISA.  All in all, this should have been a relatively straightforward question for AF4 candidates.

Question (f) asked for the key principles of modern portfolio theory when constructing an investment portfolio, and this was for 10 marks.  Question (g) was outlining why the adviser is considering the use of a DFM service as well as passive funds, and the second part of the question was stating the potential risks of using a DFM service.

The final question tested behavioural finance; it was for only four marks but was an interesting way to end this first question.

Overall, Question 1 tested many areas, but all should have been within the AF4 candidate’s reach.

Question 2

Question 2 introduced us to Efekan, aged 64, planning to retire in the next 12 months.

There were six questions in total, some of which had sub-questions.  The areas tested were:

• The main risks of investing in high yielding alternative income products
• The main types and characteristics of preference shares
• Considerations that could impact the client’s achieving his income in retirement
• The benefits and drawbacks of transferring existing assets to a platform
• The main categories of benchmark used by fund managers
• The key differences between MO and M4, how the Bank of England can reduce money supply and the effect on interest rates
• Finally, the reasons why the money supply is not suitable as a benchmark for the client’s investment portfolio

Within this second case study, there was a balance of hard and fair questions; some may have proved challenging, but equally others should not have caused problems.

Question 3

The final question was regarding a higher rate taxpayer who was reinvesting proceeds from a buy-to-let property sale into, potentially, SEISs.  Candidates were also given a table of financial information in one company she was interested in investing in.

The questions starting nicely with calculations for P/E ratio and ROCE; candidates should have been expecting questions of this nature so should have been well prepared.  Question (b) also asked for the general limitations of using investment ratios, and again these 5 marks should have been easily achieved.

Question (c) was for eight marks and was on factors: those that could affect the company’s share price.

Question (d) was on the SEIS: how it could be used to mitigate her CGT liability and the initial income tax treatment.

Finally, candidates were asked to describe a momentum investment style and a contrarian investment style.

Overall, this paper felt fair with plenty of general areas where candidates could have picked up good marks.

Comparison to the April 2019 Exam

Let’s compare it with what was tested in April.

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

This paper tested the following areas:

• Fact finding to establish a client’s investment needs
• The purpose (and calculation) of the information ratio/reasons why the REIT may have achieved the highest information ratio
• The reasons why the OEIC has a higher level of cash/effects of higher level of cash
• The ways in which an open ended structure (and a closed-ended fund structure) could respond to a liquidity crisis following substantial redemption requests
• Efficient frontier curve/how it’s used in planning and the limitations of using it
• Weak form of EMH
• Strategic and tactical asset allocation
• Yield curves
• Benefits of using the CAPM
• Calculation and theory question on beta
• Fees included within the OCF and four other costs that might be paid in the fund
• Modified duration
• Methods of tracking an equity ETF
• Factors to consider when deciding whether to invest in OEICs or ETFs
• Calculations on the undiluted NAV per share and its discount/premium/diluted NAV
• Gearing ratio / EPS / dividend cover
• Exercising a warrant, consequences of an increase in borrowings, deep value investment strategy and the main risks specific to a company

There are so many topics that could be tested in this exam that studying old exam guides is vital to see the style of question asked in AF4, as well as what has come up in the most recent exam sittings.

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!