investment club national conference 2007 at last….the unit value system explained! dave gaskell...

INVESTMENT CLUB NATIONAL CONFERENCE 2007

At last….The Unit Value System Explained!

Dave Gaskell & Mourad KaraRolling Stocks Investment Club Mobius Investment Club

[email protected] [email protected]

mailto:[email protected]

mailto:[email protected]


Outline

• Accounting approaches• Equal Share • Unit Value

• Performance measures• Unit Value• Return rates

• Summary


Equal Share Approach

...all have equal share• No matter how big the pie....

• When new members join... ...they put in same amount

• What if the slice is too much for the new member?

• What if an existing member wants to take some out?

• What if an existing member wants to put more in?

Can anyone think of a weakness?


Illustrative Example£60k total

Consider a club worth £60,000 and with 6 members

A new member would need £10,000 to join !!

Would you really want to refuse new members…….…………………….even if they were willing to put in £1000 or £2000?

£? each£10k each

There is another way!!


Unit Value System

Needs a bit more mathematics:


Unit Value System – The Set UpConsider a club worth £60,000 and with 6 members

Total Assets = £60,000Member Value = £10,000

Set a starting Unit Value UV = 100p

Q: How many units does the club have?

Total Units = 60,000

Q: How many units does each member have?

Member Units = 10,000

Alex wants to join and has £1000

Q: How many units can Alex buy?

Alex Units = 1,000(UV=100p so £1000 buys 1000 units)

The status after Alex joins: Total Assets = £61,000UV = 100pTotal Units = 61,000Member Units = 10,000Alex Units = 1,000


UV System – Next Month (Part 1)

Assume assets go up 20%

Last Total = £61,000

Calculate new Unit Value New UV = Total Assets Total Units

Total Units = 61,000Member Units = 10,000

Calculate Member Allocations

Member Alloc.= £12,000Alex Alloc. = £1,200

From previous

= 73200 ÷ 61000 = 120p

(No.Units x Unit Value)

Alex Units = 1,000

New Total = £

73,200


UV System – Next Month (Part 2)

Let members put in £100 subs

Asset Total = £73,200

Alex puts in £200 £200 buys 166.666 units

Total Units = 61,000Member Units = 10,000

Status at the end of the month: Units:Alex = 1,166.666Others =10,083.333

£100 buys units

83.333(Subs ÷ Unit Value)

Alex Units = 1,000Unit Value = 120p

______?

Value:Alex = £1,400.00Others =£12,100.00


Quick Review

Equal Share Approach• Simple to implement and manage• Complete Lack of Flexibility:

– New member joining – pay and catch up– Can’t increase or reduce monthly subscription

– Everyone must or nobody can

– Can’t handle one-off top-ups– Everyone must or nobody can

– Can’t handle people withdrawing some funds– Everyone must or nobody can


Quick Review

Unit Value Approach• Completely Flexible

– New members can join at any level– Everyone can have different monthly sub amounts– Can allow individuals to put extra in at any time– Can allow individuals to take some out

• Needs a bit more maths….but Easy in a spreadsheet Most Treasurer software packages handle it (COW, TTT, etc.) Once done for a month or two – it’s easy.


How well are we doing?

Let’s focus on investment performance,

So we

1. Invest in the club – monthly subs

2. Make investment decisions

3. Buy/sell shares (or other alternatives)

4. Measure performance


Performance Measures

How well are we doing?

• Are we making any money?

• Are we beating the FTSE (benchmark)?

• Tools available include: IRR and UVSIRR = Internal Return Rate

UVS = Unit Valuation System


Are we beating the benchmark?

• Used to compare club performance to an index or benchmark. 0

102030405060708090

100110120130140150160

Unit Value (in pence)

FTSE-allshare index rebased

• Use UVS• Measures how well you as investors have done with the club funds


Are we beating the benchmark?

• To compare club performance to an index or benchmark.

• Use UVS• Measures how well you as investors have done with the club funds

RSIC Unit Value (UV)

0

100

200

300

400

500

600

700

800

900

1000

Jun-

98

Oct

-98

Feb

-99

Jun-

99

Oct

-99

Feb

-00

Jun-

00

Oct

-00

Feb

-01

Jun-

01

Oct

-01

Feb

-02

Jun-

02

Oct

-02

Feb

-03

Jun-

03

Oct

-03

Feb

-04

Jun-

04

Oct

-04

Feb

-05

Jun-

05

Oct

-05

Feb

-06

Jun-

06

Oct

-06

Feb

-07

Jun-

07

Oct

-07

RSIC Unit Value FTSE Allshare (rebased)


Unit Value - Misconception

Invested #units Valuation UV

Club A £1000 1000 £1000 100p

Club B £1000 1000 £1000 100p

Club A - 1000 £3000 300p

Club B - 1000 £333 33.3p

Club A £9000 4000 £12000 300p

Club B £9000 28027 £9333 33.3p

Club A - 4000 £6000 150p

Club B - 28027 £18666 66.6p


Are we making any money?

• Use internal rate of return

• IRR tells you how much you got back from the money you put in

• Can use this rate to compare to bank savings rate, inflation etc…

Cash flow example

Jan07 Subs £500

Jan07Buy HMY

£3000

Jan07Sell

RIO£4500

::::::::::::: ::::::::: :::::::::

Dec07 Buy £5000

Annual RR

14%


Summary

• Most important thing is to understand the context of these two tools

• Use the right tool for your question • They are simple – easy to use and misuse

so needs practice.

• IRR aka Money Weighted Rate of Return• UVS aka Time Weighted Rate of Return


Summary: UVS versus Share

Scheme Good Not good

UVS FlexibleMore work – valuation

Equal

ShareEase of use and maintain

Very restrictive


Summary

• Both Mobius and Rolling Stocks use the UVS and IRR extensively to review performance.

• This is a very short insight – happy to assist other clubs to understand usage (and avoid-misuse)

• See Clubs’ web sites.


Club Links

• Mobius Investment club:

• www.mobiusclub.co.uk

• Rolling Stocks investment club: http://www.rollingstocks.co.uk/

http://www.mobiusclub.co.uk/

http://www.rollingstocks.co.uk/



investment club national conference 2007 at last….the unit value system explained! dave gaskell...

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