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

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

4. INVESTMENT CLUB NATIONAL CONFERENCE 2007 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?

5. INVESTMENT CLUB NATIONAL CONFERENCE 2007 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!!

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

7. INVESTMENT CLUB NATIONAL CONFERENCE 2007 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 = 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 = £61,000 UV = 100p Total Units = 61,000 Member Units = 10,000 Alex Units = 1,000

8. INVESTMENT CLUB NATIONAL CONFERENCE 2007 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 = 61,000 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

9. INVESTMENT CLUB NATIONAL CONFERENCE 2007 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 = 61,000 Member Units = 10,000 Status at the end of the month: Units: Alex = 1,166.666 Others =10,083.333 £100 buys units 83.333 (Subs ÷ Unit Value) Alex Units = 1,000 Unit Value = 120p ______? Value: Alex = £1,400.00 Others =£12,100.00

10. INVESTMENT CLUB NATIONAL CONFERENCE 2007 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

11. INVESTMENT CLUB NATIONAL CONFERENCE 2007 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.

12. INVESTMENT CLUB NATIONAL CONFERENCE 2007 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

13. INVESTMENT CLUB NATIONAL CONFERENCE 2007 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

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

15. INVESTMENT CLUB NATIONAL CONFERENCE 2007 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

16. INVESTMENT CLUB NATIONAL CONFERENCE 2007 Unit Value - Misconception Invested#unitsValuationUV Club A£10001000£1000100p Club B£10001000£1000100p Club A-1000£3000300p Club B-1000£33333.3p Club A£90004000£12000300p Club B£900028027£933333.3p Club A-4000£6000150p Club B-28027£1866666.6p

17. INVESTMENT CLUB NATIONAL CONFERENCE 2007 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 Jan07Subs£500 Jan07 Buy HMY £3000 Jan07 Sell RIO £4500 :::::::::::::::::::::: Dec07Buy£5000 Annual RR 14%

18. INVESTMENT CLUB NATIONAL CONFERENCE 2007 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

19. INVESTMENT CLUB NATIONAL CONFERENCE 2007 Summary: UVS versus Share Scheme GoodNot good UVSFlexible More work – valuation Equal Share Ease of use and maintain Very restrictive

20. INVESTMENT CLUB NATIONAL CONFERENCE 2007 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.

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