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INVESTMENT CLUB NATIONAL CONFERENCE 2007 INVESTMENT CLUB NATIONAL CONFERENCE 2007

At last…. The Unit Value System Explained! Dave Gaskell & Mourad Kara Rolling Stocks At last…. The Unit Value System Explained! Dave Gaskell & Mourad Kara Rolling Stocks Investment Club rolling. stocks@bigfoot. com Mobius Investment Club mourad@mobiusclub. co. uk INVESTMENT CLUB NATIONAL CONFERENCE 2007

Outline • Accounting approaches • Equal Share • Unit Value • Performance measures • Outline • Accounting approaches • Equal Share • Unit Value • Performance measures • Unit Value • Return rates • Summary INVESTMENT CLUB NATIONAL CONFERENCE 2007

Equal Share Approach • No matter how big the pie. . . . all Equal Share Approach • No matter how big the pie. . . . all have equal share • When new members join. . . they put in same amount Can anyone think of a weakness? • What if the slice is too much for the new member? • What if an existing member wants to put more in? • What if an existing member wants to take some out? INVESTMENT CLUB NATIONAL CONFERENCE 2007

Illustrative Example Consider a club worth £ 60, 000 and with 6 members £ Illustrative Example Consider a club worth £ 60, 000 and with 6 members £ 60 k total £ 10 k each £? each 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? There is another way!! INVESTMENT CLUB NATIONAL CONFERENCE 2007

Unit Value System Needs a bit more mathematics: INVESTMENT CLUB NATIONAL CONFERENCE 2007 Unit Value System Needs a bit more mathematics: INVESTMENT CLUB NATIONAL CONFERENCE 2007

Unit Value System – The Set Up Consider a club worth £ 60, 000 Unit Value System – The Set Up Consider a club worth £ 60, 000 and with 6 members Total Assets = £ 60, 000 Member Value = £ 10, 000 Set a starting Unit Value UV = 100 p Total Units = 60, 000 Member Units = 10, 000 Alex wants to join and has £ 1000 Alex Units = 1, 000 (UV=100 p so £ 1000 buys 1000 units) Total Assets UV = 100 p Total Units Member Units Q: How many units does each Q: How many units does the club Alex Units Q: How many units can Alex buy? member have? The status after Alex joins: = £ 61, 000 = 10, 000 = 1, 000 INVESTMENT CLUB NATIONAL CONFERENCE 2007

UV System – Next Month (Part 1) From previous Last Total Units Member Units UV System – Next Month (Part 1) From previous Last Total Units Member Units Alex Units = £ 61, 000 = 10, 000 = 1, 000 Assume assets go up 20% New Total = £ 73, 200 Calculate new Unit Value New UV = Total Assets Total Units = 73200 ÷ 61000 = 120 p Calculate Member Allocations (No. Units x Unit Value) Member Alloc. = £ 12, 000 Alex Alloc. = £ 1, 200 INVESTMENT CLUB NATIONAL CONFERENCE 2007

UV System – Next Month (Part 2) Asset Total Units Member Units Alex Units UV System – Next Month (Part 2) Asset Total Units Member Units Alex Units Unit Value Let members put in £ 100 subs Alex puts in £ 200 = = = £ 73, 200 61, 000 10, 000 120 p £ 100 buys ______? units 83. 333 (Subs ÷ Unit Value) £ 200 buys 166. 666 units Units: Alex = 1, 166. 666 Others =10, 083. 333 Value: Alex = £ 1, 400. 00 Others =£ 12, 100. 00 INVESTMENT CLUB NATIONAL CONFERENCE 2007 Status at the end of the month:

Quick Review Equal Share Approach • Simple to implement and manage • Complete Lack 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 INVESTMENT CLUB NATIONAL CONFERENCE 2007

Quick Review Unit Value Approach • Completely Flexible – – • New members 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 ü Easy in a spreadsheet ü Most Treasurer software packages handle it (COW, TTT, etc. ) ü Once done for a month or two – it’s easy. INVESTMENT CLUB NATIONAL CONFERENCE 2007

How well are we doing? Let’s focus on investment performance, So we 1. Invest 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 INVESTMENT CLUB NATIONAL CONFERENCE 2007

Performance Measures How well are we doing? • • Are we making any money? Performance Measures How well are we doing? • • Are we making any money? Are we beating the FTSE (benchmark)? • Tools available include: IRR and UVS IRR = Internal Return Rate UVS = Unit Valuation System INVESTMENT CLUB NATIONAL CONFERENCE 2007

Are we beating the benchmark? • Use UVS • Measures how well you as Are we beating the benchmark? • Use UVS • Measures how well you as investors have done with the club funds • Used to compare club performance to an index or benchmark. INVESTMENT CLUB NATIONAL CONFERENCE 2007

Are we beating the benchmark? • Use UVS • Measures how well you as Are we beating the benchmark? • Use UVS • Measures how well you as investors have done with the club funds • To compare club performance to an index or benchmark. INVESTMENT CLUB NATIONAL CONFERENCE 2007

Unit Value - Misconception Invested #units Valuation UV Club A £ 1000 100 p Unit Value - Misconception Invested #units Valuation UV Club A £ 1000 100 p Club B £ 1000 100 p Club A - 1000 £ 3000 300 p Club B - 1000 £ 333 33. 3 p Club A £ 9000 4000 £ 12000 300 p Club B £ 9000 28027 £ 9333 33. 3 p Club A - 4000 £ 6000 150 p Club B - 28027 £ 18666 66. 6 p INVESTMENT CLUB NATIONAL CONFERENCE 2007

Are we making any money? • Use internal rate of return • IRR tells Are we making any money? • Use internal rate of return • IRR tells you how much you got back from the money you put in Cash flow example Subs Jan 07 Buy £ 3000 HMY Jan 07 • Can use this rate to compare to bank savings rate, inflation etc… Jan 07 Sell RIO : : : : : : Dec 07 Annual RR Buy £ 500 £ 4500 : : : : : £ 5000 14% INVESTMENT CLUB NATIONAL CONFERENCE 2007

Summary • Most important thing is to understand the context of these two tools 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 INVESTMENT CLUB NATIONAL CONFERENCE 2007

Summary: UVS versus Share Scheme Good Not good UVS Flexible More work – valuation Summary: UVS versus Share Scheme Good Not good UVS Flexible More work – valuation Equal Share Ease of use and maintain Very restrictive INVESTMENT CLUB NATIONAL CONFERENCE 2007

Summary • Both Mobius and Rolling Stocks use the UVS and IRR extensively to 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. INVESTMENT CLUB NATIONAL CONFERENCE 2007

Club Links • Mobius Investment club: • www. mobiusclub. co. uk • Rolling Stocks Club Links • Mobius Investment club: • www. mobiusclub. co. uk • Rolling Stocks investment club: http: //www. rollingstocks. co. uk/ INVESTMENT CLUB NATIONAL CONFERENCE 2007

INVESTMENT CLUB NATIONAL CONFERENCE 2007 INVESTMENT CLUB NATIONAL CONFERENCE 2007