The CII AF4 October 2023 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.  

This article is correct as at 20 December 2023.

You can find the exam guide here.  

Section A 

Question 1

The first question introduced us to Mitchell, the managing director of a plant hire company and as expected the questions were varied and at times challenging.

Firstly, there was a question on Modern Portfolio Theory: the aim of it and how it is achieved as well as the key assumptions upon which it is based.  The benefits of diversification were also tested within this first part.  This was a nice start to the AF4 paper and would have given candidates some confidence moving forward.

The next question asked for a description of what is measured by standard deviation followed by a calculation of it.  This is well covered in the R02 and J10 textbooks and those candidates who had practised the calculation should have done well.

Risk was the next area to be tested, and candidates had to identify the main risks relating to the client’s existing investments and give one reason for each of them. Again this should have been expected and should have been well answered.

The next question may have caused difficulties as it’s not something we think had been tested before.  The question tested the main differences between the CPI and the RPI.  Fortunately, it was only for five marks so anyone not sure of the differences did not sacrifice too many marks.

More economics followed, with candidates having to describe the main differences between broad and narrow money and the likely economic consequences of a sustained increase in the UK money supply.

We then had another common calculation which was return on equity; candidates should have been prepared for either this or ROCE.  Candidates also had to state the drawbacks to consider when using ROE as a measure of a company’s performance.

Next, came a factors question. This time the non-financial factors were required that could influence the client’s ATR and also ways in which capacity for loss can be mitigated.  Factors questions often appear in advanced papers and should pick up good marks for the well-prepared candidate.

The penultimate question tested behavioural finance, firstly overconfidence and secondly herding.  Looking at past exam guides would have shown candidates that this area often comes up.

And finally, it was a question on the ways in which an EIS could provide the client with greater tax planning opportunities compared to his stocks and shares ISA.  This would have been a very welcome question after some challenging aspects of the syllabus but unfortunately was only for four marks!

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Section B

Question 2 

This question was regarding an investment adviser who was reviewing a client’s portfolio.

First up was a calculation of alpha and also a theory question which asked what could be deduced about the performance based on the alpha figure.  Alpha is a risk-adjusted performance calculation which has been tested many times before and should have been practised in full as part of a revision programme.

Next, a description was required of the objective of gearing within an investment trust and also the possible consequences that could result from an investment trust increasing its level of borrowings. A further question asked what is meant by an investment trust trading at a discount and finally five possible reasons for the current level of discount at which one of the PLCs was trading.

Next, candidates had to identify the three main income options that could be available on the platform’s cash account to support the client in meeting his income need.  This was a  nice easy three marks.  Then a question was posed on how tactical asset allocation differs from strategic asset allocation, which would have been another welcome question in amongst some quite technical aspects of investment trusts.

Next was another factors question, this time those that could impact upon the client’s income requirement in retirement.  And finally, candidates were asked to identify the main actions that the client could take to mitigate the effects of sequencing risk.

Question 3 

The final question was regarding a new client who had been managing his own investments but was now wanting advice.  His portfolio was made up of two directly held gilts and a collective fixed-interest investment/gilts fund.  All the questions related to those investments and how they are impacted by various economic conditions.

Firstly, there was a calculation of the redemption yield for one of the directly held gilts which is another calculation that should be practised in full in the run-up to the exam.

Candidates then had to compare the characteristics of the two gilts and state what could be deduced from this information.  This has been asked before, so anyone using past exam guides would have been pleased with this question.

Next came a question asking for the main benefits and drawbacks of owning a gilt-based collective fund compared to owning gilts on a direct basis and continued with three reasons as to why index-linked gilt prices would fall when inflation is rising.

Next, more tests on economic factors: firstly the effects of increases in interest rates on conventional fixed interest securities; the main objectives of quantitative tightening (QT); the consequences of a central bank implementing QT; and finally, the main factors that would cause the UK yield curve to steepen.

The last question was on the investor protection available when investing in gilts and state, with reasons why, and whether all of the client’s portfolio was protected.

Overall, it was a paper that had a mix of quite difficult areas which would have meant candidates being aware of recent economic developments rather than just reading from the textbooks.  This was interspersed with some easier theory questions which did balance it out to some extent. The AF4 exam continues to be a challenge, and this paper did seem quite heavily focused on economics; although, anyone following recent current affairs should have been well prepared.

Comparison with the March 2023 Exam Paper 

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

The topics covered were: 

• Tax allowances
• Risk
• Options with NS&I maturities
• Benefits of NS&I products and tax
• Value based investment style
• Time weighted rate of return
• Functions of the ACD and the depository within an OEIC
• Tax treatment of VCTs and SEISs, calculation of dividends paid
• SEIS reinvestment relief
• Information ratio – calculation and theory
• Benefits of segmentation/top slicing relief
• Unfettered fund of funds vs manager of managers funds
• UK current and capital accounts
• How a current account deficit can be balanced out
• Divided cover, dividend yield and the limitations of both their uses
• Factors that can affect share prices
• Anchoring/mental accounting
• Advantages of owning direct shares vs collective funds
• Objectives of rebalancing

As you can see, there was a familiar mix of theory, calculations, and economic conditions most of which were different from the most recent examination. Candidates must use as many past exam guides as possible to have a clear idea of the range of topics tested and the type of questions that are asked, always being mindful of any changes that may have made the model answers out of date.

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!