The October 2017 Exam for CII AF4 – As Challenging As Ever!

The latest CII AF4 exam paper looked as if it was as challenging as ever, so a successful candidate would have studied the relevant CII manuals and case study workbook, and they would have been fully up to speed with current economic thinking. The following review of the October 2017 exam paper will be useful reading for those preparing to sit the CII AF4 exam.

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

Question 1

The big Section A question introduced us to a high earner with a cool £300,000 to invest.  We were told he is considering a multi-strategy macro hedge fund for his money, where one of the fund’s strategies is based on the fact that inflation in the UK will go up, and the Bank of England will raise interest rates. The first question was therefore on why the Bank of England may not raise interest rates even if inflation is over their target (and continued further on with the possible drawbacks of him investing in this type of fund).  This was not a bad start, as these issues should be of interest to anyone working in financial services.

The AF4 exam isn’t always an easy exam to predict and in the past has included its fair share of calculations.  In October’s exam there were a fair few in the first question, including what his fund would be worth after all the charges; information ratio for an ETF; annualised returns and discount to net asset value on a shareholding.  The rest of the 80 marks in Question 1 were around explanations of what the information ratio measures, the purpose of using a benchmark, the main criticisms of CAPM and the recent changes in VCT legislation.

A tough first question, but enough of the familiar areas being tested again for candidates to pick up decent marks.

Question 2

The next section was comprised of two 40-mark questions.  The first one concerned an imaginatively named firm of architects (Big Draw plc!) and a rival firm Sky High.  In traditional fashion, we are given two tables with accounting details.

More calculations followed with operating profit margin, revenue per employee and an explanation of why this is important for analysis and a comment required on the trend for operating profit margin and revenue.  Candidates also had to calculate dividend yield and earnings per share.

This question seemed to throw in relatively new concepts to AF4 as well as the well-trodden areas like dividend yield etc.

Question 3

This was was surprisingly short – just two paragraphs of information – a welcome relief from the often lengthy case studies in AF exams.  The case study involved a recently retired father investing in fixed interest, with an interest in commercial property and his daughter, hoping to buy her first home, who thinks an ISA might be suitable.  She is aged 20, so before we turned the page it was obvious where one of the questions was going… and yes part D was all about the LISA albeit some theory and some calculations, but even so, the end of the exam was light relief compared to some earlier content.  The father’s situation was covered in the first 3 parts of the question; candidates needed to offer seven factors in relation to the underlying investments that determine the return on a commercial property fund; the risks of REITs and an OEIC investing in property and an explanation of why property investment may protect him in a climate of rising inflation compared to a portfolio of fixed interest bonds.

Let’s see how this compared with the April 2017 paper.

Very different areas were tested in Question 1, with the main focus on gilts with smaller-mark questions on the use of interest rates stimulating consumer spending.  The question was split between 15 theory questions and only 4 calculations to do, which took up only 16 of the marks, meaning 64 were on offer for knowledge on gilts, sterling options and the very last question on peer-to-peer lending.

In Question 2, 10 marks were awarded for the calculations and 30 marks for theory.  It was a fair question: alpha, value investing, price earnings ratio and 5 marks for explaining the limitations of only using ratio analysis in making investment decisions.

Question 3 awarded 12 marks for calculations and 28 for theory.  This time, we had expected returns, range of returns, charges, self-selection, the differences in AIM shares and the main market and finally 4 marks for explaining how technical analysis is used to make investment decisions.

All the topics tested are covered in the J10 manual (Discretionary Investment Management); although, it is also necessary with this exam to keep up to date with the current economic climate too. For most advisers this would form part of their normal day, so shouldn’t cause problems.

Anyone planning for April’s exam needs to get hold of as many past papers as possible, as clearly the previous exam paper helps on style and format but not so much on content.  A detailed study plan should be put in place (and followed!).  This exam is not easy and students need to give themselves plenty of time to ensure they understand the products, investment theory as well as the numerous calculations.

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!