The CII AF4 October 2024 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 27 December 2024.
You can find the exam guide here.
Section A
Question 1
The main question introduced us to Cassie and Tasuku, a married couple in their late 50’s, looking to retire in the next few years. Cassie had an onshore investment bond and a GIA all invested in a UK fixed-interest collective fund. We had been told that the duration had increased significantly. Tasuku had a portfolio of stocks and shares ISAs. Other product areas mentioned were structured products and NS&I policies.
The exam started with a question, for eight marks, asking for the tax treatment of the income stream from the bond and GIA. No calculations were required, so it should have been a welcome start to the exam with only an outline required. Candidates also had to identify four benefits of investing in a GIA compared to a bond.
Question (b) opened up the technical testing with 4 small questions around the fixed-interest collective fund. Firstly, candidates were tested on what is measured by Macaulay duration, then how it would be used within a fixed interest fund, with part (iii) asking how modified duration would be used within a fixed-interest fund. Finally, 5 marks were awarded for the correct identification of the economic and market factors that would likely cause an increase in the duration of a fixed-interest fund. Overall, 15 marks were on offer for this question, and although candidates would have been familiar with the concept, they would have needed to draw on knowledge as well as application of that knowledge.
Question (c) moved into a more familiar area where candidates were asked for a description of the main characteristics of growth and value investment strategies. This was for 10 marks in total, and anyone missing some marks in (b) should have been able to catch up with this question.
The exam continued with Question (d), with candidates having to explain firstly the objective of regression analysis and identify two ways in which it can be applied in investment planning and then explain what is measured by the r-squared value in respect of the fund. This may have caused difficulties but both parts only made up four marks each.
In Question (e) candidates were asked to calculate the money-weighted rate of return for a fund. This was for 10 marks with another 3 marks available for giving the drawbacks of using the MWR. This is a very well tested area, and any candidate who had studied the syllabus in full should have been able to pick up most, if not all, of these marks.
In (f) candidates were asked to firstly comment on the structure and operation of a structured product where the information was given in a table. Then for eight marks they needed to identify four main risks of investing in structured products and state one example of each type of risk. Structured products are covered well within the supporting text books and the risks are well known so again the majority of these marks should have been attainable.
Finally, the question on NS&I products – candidates had to outline the main features of Income Bonds. This was for seven marks and then for a further three marks, state three reasons why NS&I Income Bonds may be more suitable for the clients than NS&I Green Savings Bonds. Depending on how closely candidates had revised NS&I products, this could have been a good way to end Question 1.
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Section B
Question 2
The smaller Question 2 tested areas such as fund of funds, the Capital Pricing Asset (CAPM) Model, model portfolio services, and discretionary investment management (DIM). The case study also eluded to a question on benchmarking.
Firstly, we had a calculation: five marks were available to calculate the expected return for the portfolio based on the CAPM. Another four marks were awarded for the benefits of using the CAPM. Modern portfolio theory generally is often tested within AF4 and well covered in the supporting text books, so these questions should not have caused too many difficulties.
Question (b) tested the main differences between a fund of funds service and a managed portfolio service. The second part of the same question asked for five provider-related factors that an adviser would take into consideration when evaluating a DIM service. This was a good test of knowledge as well as candidates having to think beyond this and apply their knowledge to the question being asked. Part (iii) of the same question asked for the four main risks of using a DIM service compared to investing in a fund of funds.
In part (c), the question asked for the identification and explanation of the four main investor return objectives (capital preservation, capital appreciation, current income, and total return); this gave a total of eight marks. In part (ii), the five main client-related factors that impact investment returns and a portfolio’s capability to achieve its objectives were required. This was a basic investment planning question and should have been relatively easy marks for a well-prepared AF4 candidate to achieve.
Finally in (d), the three main types of benchmark were tested with candidates having to briefly describe the purpose of each type. This was for six marks and has been tested relatively recently so anyone using past exam guides should have had no difficulties.
Question 3
The final question included a table of accounting information on a company called Silver Elliptical plc which was being considered for a stocks and shares ISA. It was straight away clear that some ratios would be tested. The questions were split into five with at least two parts to each and in (a) there were three parts. There were plenty of small-mark questions making up the overall 40 available.
As expected, the first couple of questions were calculations. Firstly, for four marks, candidates had to calculate the operating profit margin for Silver Elliptical plc and for eight marks, the ROCE. As previous exams have tested, candidates had to then comment on what can be deduced from the ROCE figure – this was for three further marks.
The calculations continued in (b) with the working capital ratio required for the plc – this was for three marks and for another three marks, and using figures worked out and those in the table, candidates had to comment on the company’s working capital position.
The current account and non-current account assets were then tested – with a further three marks required for a brief description of the main differences. This, like the others so far, is another previously tested question.
In part (ii), two categories of assets were asked for that would be found under each of the Current and Current headings of a company’s balance sheet. This was for four marks.
In (d), candidates had to identify three differences in the main listing criteria between AIM and the UK main market and in part (ii) describe how a market capitalisation-weighted index is constructed.
Finally in the last question, candidates had to state two asset types that are permissible investments within an IFISA. This was for just two marks and for the final three marks, identify three main risks specific to investing in an IFISA. Even if candidates hadn’t specifically covered this area in their studies, we feel sure that some of the risks could be arrived at and certainly the investments.
Overall, the two smaller mark questions covered standard AF4 questions which should not have caused too much difficulty with candidates and provided a balance with the first question. The first question did cover some areas which may not have been as widely tested in the past but as always, if candidates had studied the syllabus in full using past exam guides, a pass should have been attainable.
Comparison with the March 2024 Exam Paper
Let’s look at what was tested in March 2024’s paper. This question paper can be found here.
The topics covered were:
- Factors for an annual review
- Beta
- GAARP and growth investing
- Risk adjusted ratios
- Real estate investment trusts
- Benefits of commercial property
- Stochastic modelling
- GDP
- ISA investing
- Friendly society policies
- Active versus passive
- ISAs versus personal pensions
- Investment trusts
- Deferral relief on an EIS
- EISs versus VCTs
As you would expect, some different areas tested although interesting that fund management styles appeared in both exams in 2024.
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