Outline

2. 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

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

4. 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

5. 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

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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Unit Value - Misconception INVESTMENT CLUB NATIONAL CONFERENCE 2007

17. 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

18. 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

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

20. 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

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