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Understanding the Unit Value System in Investment Clubs

Dive into the intricacies of the Unit Value System presented by Dave Gaskell and Mourad Kara at the 2007 Investment Club National Conference. This informative session covers the Equal Share Approach versus the Unit Value System, explaining their implications for new and existing members. Discover how the Unit Value System allows for more flexibility, accommodating varied member contributions and withdrawals. Learn to measure investment performance with internal rates of return and unit valuation systems, ensuring your club's financial health and growth strategies.

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Understanding the Unit Value System in Investment Clubs

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  1. At last….The Unit Value System Explained! Dave Gaskell & Mourad KaraRolling Stocks Investment Club Mobius Investment Clubrolling.stocks@bigfoot.commourad@mobiusclub.co.uk INVESTMENT CLUB NATIONAL CONFERENCE 2007

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

  3. 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

  4. Illustrative Example £60k total Consider a club worth £60,000 and with 6 members £10k 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

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

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

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

  8. UV System – Next Month (Part 2) Asset Total = £73,200 Total Units = 61,000 Member Units = 10,000 Alex Units = 1,000 Unit Value = 120p Let members put in £100 subs ______? £100 buys units 83.333 (Subs ÷ Unit Value) £200 buys 166.666 units Alex puts in £200 Units:Alex = 1,166.666Others =10,083.333 Status at the end of the month: How Easy Was That !! Value:Alex = £1,400.00Others =£12,100.00 INVESTMENT CLUB NATIONAL CONFERENCE 2007

  9. 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

  10. 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. INVESTMENT CLUB NATIONAL CONFERENCE 2007

  11. How well are we doing? Let’s focus on investment performance, So we • Invest in the club – monthly subs • Make investment decisions • Buy/sell shares (or other alternatives) • Measure performance INVESTMENT CLUB NATIONAL CONFERENCE 2007

  12. 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

  13. 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

  14. 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

  15. Unit Value - Misconception INVESTMENT CLUB NATIONAL CONFERENCE 2007

  16. Are we making any money? Cash flow example • 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… INVESTMENT CLUB NATIONAL CONFERENCE 2007

  17. 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

  18. Summary: UVS versus Share INVESTMENT CLUB NATIONAL CONFERENCE 2007

  19. 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

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

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