The CII AF4 October 2021 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.
You can find the exam guide here.
On first reading, this seemed like a very well balanced AF4 paper covering a spread of topics, so it was a surprise to read the examiner’s comments that revealed candidates did not perform as well as the previous sitting in June last year. As also stated though, this may have been because candidates had longer to prepare for the June exam, as it had been postponed from earlier in that year.
The first question – awarding 80 marks – introduced us to Clara and Lucy with various investments and wishing to buy a property in three years’ time.
Question (a) was in two parts. Firstly, candidates had to calculate the alpha for an OEIC fund; this was for six marks. Secondly, candidates were asked to state, for four marks, the limitations of using alpha to measure a fund’s performance.
Question (b) was also in two parts. Firstly, candidates had to identify and explain 4 main types of investment risk that would be relevant to the OEIC invested in large cap UK equities. This was for eight marks. Secondly, the question asked for the main types of investment risk that would be relevant to the investment trust investing in technology companies. This was for another eight marks. The question had clearly stated to exclude market risk and also stated in part (ii) that candidates should not repeat their answer from part (i). However, according to the examination guide, this is exactly what candidates did. This is a stark reminder for those taking AF4 in the future that they should be careful to read the question as well as any supplementary information.
Question (c) was made up firstly of two calculations: the overall return of the investment trust – for five marks – and then the relative performance of each geographical allocations against their respective benchmark returns. This was for four marks. Candidates then had to identify the geographical allocation that had made the greatest impact on the investment trust’s performance relative to its benchmark. This was for just two marks. Overall, candidates did well on this question.
Question (d) moved onto questions on Lifetime ISAs and Help-to-Buy Schemes. Firstly, for three marks, there was a very simple question asking for the maximum amount that Lucy and Clara could each contribute to a Lifetime ISA in its first year and any Government bonus that may be payable. Secondly, candidates had to explain the main contribution and withdrawal rules for a Lifetime ISA (excluding the answers already given in part (i)). This also seemed like a very generous eight marks for a level six paper. Next, candidates had to outline the options available to Lucy in respect of her existing Help-to-Buy ISA (this was for four marks) and finally, the exam asked for the information that an ISA administrator would need to process an additional permitted subscription (APS) request by a surviving civil partner. This was for six marks.
Question (e) was another two-part question, which started very nicely with a question on the main differences in the structure of an OEIC and an Investment Trust. This was for eight marks and should have caused no problems for candidates, yet the examination guide seems to suggest differently with some confusing basic details of the two. Candidates also had to describe the main differences in the pricing of an OEIC and an Investment Trust and again, candidates at this level should have picked up most of the eight marks on offer.
Finally, question (f) asked for three advantages and three disadvantages of using a GIA for retirement planning, compared to a workplace pension. This seemed like a good way to end the main case study in the exam and the exam guide confirms that candidates did indeed do well.
This question concerned Anshul, a director and majority shareholder in a manufacturing business. He was considering partial retirement and the sale of his shareholding.
The first question asked for the six main benefits to Anshul of consolidating his existing collective funds onto a platform; candidates performed well demonstrating ‘detailed knowledge’.
Next, question (b) asked for the time limits within which CGT deferral relief would be available to Anshul on a new investment into an EIS. This was for just three marks, which most candidates gained. Part (ii) asked for the CGT rules of any new investment into an EIS, if the investment were made with the proceeds from the sale of the shares. This was for eight marks and the exam guide states here that ‘candidates performed adequately’.
Question (c) was a calculation of the Income Tax and CGT reliefs that could be claimed by Anshul if he invested the maximum amount into a new SEIS. This was for another seven marks and yet it seems candidates did not spend as much time revising the SEIS rules as they did for an EIS.
Question (d) asked for two factors relevant to Anshul, from a behavioural finance perspective and give one reason for each of these factors. This was for four marks and happily candidates did well by correctly identify anchoring, the endowment effect and mental accounting.
The first part of Question (e) asked for the objective of Stochastic modelling. This was for five marks and in part (ii) candidates had to state the three main inputs required to generate an optimal portfolio via a Stochastic modelling tool. Finally, in part (iii), four drawbacks of using a Stochastic modelling tool were required. This was the first time this syllabus area had been tested so it was good to read that candidates performed well.
Onto the final question and here candidates were presented with two tables, showing a selection of the accounts of two UK-listed companies recently added within a collective fund.
Firstly in question (a), candidates had to calculate the return on equity for the company called Forest View plc. This was for nine marks. In part (ii), a description was required of what is measured by the ROE metric (for four marks). This is tested regularly so the majority of candidates did well.
Question (b) started with a calculation of the quick ratio for the second company, Cloud Formation plc. This was for four marks and again has been tested regularly in the past. Candidates then had to explain what the ratio shows about Cloud Formation plc’s current financial position, based on the calculation in part (i). this was for a further three marks. In part (iii) candidates had to state the two main Asset headings within the balance sheet of a company’s accounts and list two categories of assets that would be found under each heading. This was for six marks and may have proved challenging as it is an area not often examined and despite company accounts being within the R02 manual, it is unlikely too much time is spent studying the headings.
Question (c) started with a three-mark question on the main components of the UK’s capital with question (ii) asking for the principal purpose of a capital account surplus within the UK’s balance of payments (for a further three marks). Part (iii) asked for an explanation of the macro-economic role of financial investment within the economy. This was for four marks. The exam guide stated that ‘candidates performed adequately’ with differing performance between the three parts with the statement that ‘knowledge of macro-economics is generally poor’ yet it tends to be examined in some way at most sittings.
Question (d) asked, for four marks, what is meant by the OCF in respect of a collective fund and it is pleasing to read that this was answered well.
Overall, this seemed to test areas not as challenging as previous papers. Although some of the questions in the final part of the exam were new this was balanced by some easier marks from questions 1 and 2.
Comparison with the June 2021 Exam Paper
Let’s look at what was tested in June 2021’s paper. This question paper can be found here.
The topics covered were:
- Macaulay duration
- NS&I Income Bonds and Premium Bonds
- Standard deviation
- Onshore and offshore investment bonds
- Strategic / tactical asset allocation
- Redemption yields and running yields
- Benefits of gilt-based collective compared to a direct gilt
- Credit risk
- Rights issue
- Smart beta strategies
The two exam papers were very different covering a wide range of topics; future candidates should ensure they use as many past papers as they can so they are fully prepared for the type of question asked and the level of detail needed to gain maximum marks.
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