Unit%20Value%20System%20Explained

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At last.The Unit Value System Explained! Dave
Gaskell Mourad KaraRolling Stocks Investment
Club Mobius Investment Club
rolling.stocks_at_bigfoot.com
mourad_at_mobiusclub.co.uk
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Outline

• Accounting approaches
• Equal Share
• Unit Value
• Performance measures
• Unit Value
• Return rates
• Summary

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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?

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Illustrative Example
60k total
Consider a club worth 60,000 and with 6 members
? each
10k 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!!
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Unit Value System
Needs a bit more mathematics
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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(UV100p 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?
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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
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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
UnitsAlex 1,166.666Others 10,083.333
Status at the end of the month
How Easy Was That !!
ValueAlex 1,400.00Others 12,100.00
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Quick Review

• Equal Share Approach
• Simple to implement and manage
• Complete Lack of Flexibility
• New member joining pay and catch up
• Cant increase or reduce monthly subscription
• Everyone must or nobody can
• Cant handle one-off top-ups
• Everyone must or nobody can
• Cant handle people withdrawing some funds
• Everyone must or nobody can

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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 its easy.

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How well are we doing?

• Lets focus on investment performance,
• So we
• Invest in the club monthly subs
• Make investment decisions
• Buy/sell shares (or other alternatives)
• Measure performance

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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

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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.

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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.

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Unit Value - Misconception
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
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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

Jan07 Subs 500
Jan07 Buy HMY 3000
Jan07 Sell RIO 4500

Dec07 Buy 5000
Annual RR 14 14
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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

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Summary UVS versus Share
Scheme Good Not good
UVS Flexible More work valuation
Equal Share Ease of use and maintain Very restrictive
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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.

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Club Links

• Mobius Investment club
• www.mobiusclub.co.uk
• Rolling Stocks investment club
  http//www.rollingstocks.co.uk/

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