Unit Valuation For Investment Club

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Investment Club unit if value as a measurement system

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Unit Valuation For Investment Club

  1. 1.   Unit Valuation System Presentation
  2. 2.  Accounting approaches  Equal Share - No matter how big the pie.... …All have equal share o Can anyone think of a weakness? o What if the slice is too much for the new member? o What if an existing member wants to put more in?  Unit Value o Truthfully, it's not a difficult concept, The unit value of the club is just a representation of how the club is doing 2
  3. 3.  If it were practical for all members of an investment club to always remain exactly equal owners of the club, a unit value system might not be necessary.  However, not only is “equal ownership” over time impractical, it’s unnecessary and even undesirable. For example, most clubs consider it beneficial to have the flexibility to add new members without requiring that they invest the current market value of an existing member at their first meeting.  Also, partial withdrawals always result in unequal ownership and most clubs want their members to have that option. 3
  4. 4.  When members invest money in their club they purchase club “units”. The number of units purchased depends on the amount of money invested and the current unit value (i.e., the Shilling value of one unit) on the date the money is invested.  When a new club is started, the unit value is set at some arbitrary value (typically Ksh1000). The specific value chosen for the beginning unit value is completely unimportant. To determine unit value on any particular date after that, the total value of all club assets is divided by the total number of units owned by all club members. 4
  5. 5.  New units are created only when club members invest new money in a club. All other money added to a club (member fees, interest, dividends, etc.) increases the unit value (without changing the number of units).  Unit value also changes along with the fluctuating value of securities held by a club.  Units are removed (without changing the unit value) only when club members withdraw or when expenses are allocated equally among members. Unit value is reduced (without changing the number of units) by expenses allocated among members in proportion to their club ownership and by money leaving a club for some other reason (loans, for example). 5
  6. 6. Consider a club worth £60,000 and with 6 members Total Assets = £60,000 Member Value = £10,000 Set a starting Unit Value UV = 100shares 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=100shares so £1000 buys 1000 units) The status after Alex joins: Total Assets = £61,000 UV = 100shares Total Units = 61,000 Member Units = 10,000 Alex Units = 1,000
  7. 7. Assume assets go up 20% Last Total = £61,000 Calculate new Unit Value New UV = Total Assets Total Units Total Units = 61,000 Member Units = 10,000 Calculate Member Allocations Member Alloc.= £12,000 Alex Alloc. = £1,200 From previous = 73200 ÷ 61000 = 120shares (No.Units x Unit Value) Alex Units = 1,000 New Total = £73,200
  8. 8. Let members put in £100 subs Asset Total = £73,200 Alex puts in £200 £200 buys 166.666 units Total Units = 61,000 Member Units = 10,000 Status at the end of the month: Units: Alex = 1,166.666 Others =10,083.333 £100 buys units83.333 (Subs ÷ Unit Value) Alex Units = 1,000 Unit Value = 120shrs ______? Value: Alex = £1,400.00 Others =£12,100.00
  9. 9. Assume assets go up 20% Last Total = £61,000 Calculate new Unit Value New UV = Total Assets Total Units Total Units = 61,000 Member Units = 10,000 Calculate Member Allocations Member Alloc.= £12,000 Alex Alloc. = £1,200 From previous = 73200 ÷ 61000 = 120p (No.Units x Unit Value) Alex Units = 1,000 New Total = £73,200
  10. 10. Let members put in £100 subs Asset Total = £73,200 Alex puts in £200 £200 buys 166.666 units Total Units = 61,000 Member Units = 10,000 Status at the end of the month: Units: Alex = 1,166.666 Others =10,083.333 £100 buys units83.333 (Subs ÷ Unit Value) Alex Units = 1,000 Unit Value = 120p ______? Value: Alex = £1,400.00 Others =£12,100.00
  11. 11.  Consider an Investment Club with 10 member, who normally contribute £100 in monthly subscriptions to their Investment Club fund. We are going to focus on one member of the club called 'Joe Bloggs'. If you take a look at the following table it provides an overview of the club's performance over time: 11
  12. 12.  For the first 5 months, each club member contributes and equal amount of money and as the club performance increases and decrease, the unit value changes accordingly.  At the start of the first month, each member contributed £100, which is a total subscription of £1,000. The starting unit value was set to £1 by the club members, therefore the number of units allocated to each member was 100 (i.e. each club members monthly subscription divided by the unit value).  The club then invested the £1,000 and the end of the first month made a return on investment of £250, therefore increasing the club Net Asset Value to £1,250. At the end of the first month the unit value has now increased because the Net Asset Value has increased. The resulting Unit Value is increased from £1 to £1.25 (i.e. the end of month Net Asset Value divided by the number of allocated units = £1,250 / 1,000 = £1.25). 12
  13. 13.  At the start of the second month, each of the club members contribute a further £100 each, which increases the Net Asset Value by £1,000.  This time they receive less unit for their £100 contribution as the unit value has increased from £1 to £1.25.  The number of units that they get for their monthly subscription of £100 is 80 units, which is determined by dividing the subscription contribution by the unit value i.e. £100 / £1.25 = 80 units. 13
  14. 14.  In the third, fourth and fifth month each club member continues to contribute £100 per month and the number of units that get is based on the previous ending monthly Unit Value. 14
  15. 15.  At the start of the sixth month, Joe Bloggs decides to withdraw £100 from the investment club when the unit value is £1.70. To do so he 'sells' units back to the club, who in turn cancel the units. To withdraw £100 Joe Bloggs must sell approximately 59 units at a price of £1.70 per unit.  As the Net Asset Value is reduced by £100 and the number of allocated units is reduced by 59 units due to the process of unit cancellation, with the result being that the unit value remains consistent at £1.70 (i.e. the ending Net Asset Value in month 5 is reduced £100 from £6,250 to £6,150 and the number of units are reduced by 59 due to member withdrawal of £100 therefore reducing the total number of units from 3,670 to 3,611; the resulting unit value is then unchanged because £6,250/3,670 units = £6,150/3,611 units = £1.70) 15
  16. 16. 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
  17. 17. 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.
  18. 18. Scheme Good Not good UVS Flexible More work – valuation Equal Share Ease of use and maintain Very restrictive
  19. 19. 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
  20. 20. 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 – Farming or rela estate) 4. Measure performance

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