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unitisation

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CliffEdge
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unitisation

#219372

Postby CliffEdge » May 3rd, 2019, 7:16 pm

Sorry this is a long post. I've found problems with the 'normal' unitisation methods but I think it can be useful so came up with my own calculation method. See below for an example:

Unitisation Example

1. 10,000 invested

Fund Value (FV) = 10,000
Base Unit Value (BUV) = 100
Total Base Units (TBU) = FV/BUV = 10,000/100 = 100
Current Unit Value (CUV) = FV/TBU = 10,000/100 = 100

2. FV increases to 20,000

FV = 20,000
BUV=100 TBU=100
CUV = FV/TBU = 20,000/100 = 200

3. Added Investment (AI) = 10,000

FV - 30,000
Added Base Units = AI/BUV = 10,000/100 = 100
TBU = 100+ABU = 200
CUV = FV/TBU = 30,000/200 = 150

4. FV drops to 15,000

CUV = FV/TBU = 15,000/200 = 75

5. 5,000 is sold

FV = 15,000-5,000 = 10,000
TBU = 10,000/15,000 * 200 = 133.3
CUV = FV/TBU = 10,000/133.3 = 75 (unchanged)

6. FV increases to 20,000

CUV = FV/TBU = 20,000/133.3 = 150

7. Added investment (AI) = 5,000

FV = 20,000+AI = 25,000
ABU = AI/BUV = 5,000/100 = 50
TBU = 133.3+50 = 183.3
CUV = FV/TBU = 25,000/183,3 = 136.4

8. sell 5,000

FV = 20,000
TBU = 20,000/25,000 * 183.3 = 146.6
CUV = FV/TBU = 20,000/146.6 = 136.4 (unchanged)

9. AI = 5,000

FV = 25,000
ABU = AI/BUV = 5,000/100 = 50
TBU = 146.6+50 = 196.6
CUV = 25,000/196.6 = 127.2 (changed)

10. FV increases to 100,000 !

CUV = 100,000/196,6 = 508.7

11. Sell 95,000

FV = 5,000
TBU = 5,000/100,000 * 196.6 = 9.83
CUV = 5,000/9.83 = 508.7 (unchanged)

12. AI = 5,000

FV = 10,000
ABU = 5,000/100 = 50
TBU = 9.83+50 = 59.83
CUV = 10,000/59.83 = 167 (changed)

13. AI = 90,000

FV = 100,000
ABU = 90,000/100 = 900
TBU = 59.83+900 = 959.83
CUV = FV/TBU = 100,000/959.83 = 104.2 (changed)

CliffEdge
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Re: unitisation

#219456

Postby CliffEdge » May 4th, 2019, 9:30 am

NOTES ON OP CALCULATION (1)

As I have seen it explained, conventional unitisation would be as follows for the first 4 cases in the OP

1. Initial investment 10,000

Unit Value (UV) = 100
Total Units = 10,000/100 = 100

2. fund grows to 20,000

UV = 200

3. Added investment = 10,000
UV = 200
added units = 10,000/200 = 50

Total units = 150

Fund value = 30,000

4. Fund value drops to 15,000
Unit value = 15,000/150 = 100

The problem is that with this method the fund value is now 15,000 but total investments are 20,000, that is a loss of 5,000 BUT unit value is still 100.

nmdhqbc
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Re: unitisation

#219463

Postby nmdhqbc » May 4th, 2019, 9:55 am

CliffEdge wrote:The problem is that with this method the fund value is now 15,000 but total investments are 20,000, that is a loss of 5,000 BUT unit value is still 100.


This is kind of the point of unitisation. It strips out the effects of market timing of when you buy the "fund". If you decide to add to the portfolio at opportune or bad moments then your good or bad timing of "buying" more will not be reflected in the unit values.

I think the right way to do it is to add units to the portfolio regularly mirroring the extra cash you may have in your bank account. To me that is the moment the cash enters the portfolio even if it is not invested yet. When you don't invest the extra cash you are choosing to increase the portfolios cash position and as such that should be contributing to the unit price. Then if you choose to invest it all later at some dip in the market the unit price rightly reflects your good or bad market timing.

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Re: unitisation

#219476

Postby CliffEdge » May 4th, 2019, 10:55 am

nmdhqbc wrote:
CliffEdge wrote:The problem is that with this method the fund value is now 15,000 but total investments are 20,000, that is a loss of 5,000 BUT unit value is still 100.


This is kind of the point of unitisation. It strips out the effects of market timing of when you buy the "fund". If you decide to add to the portfolio at opportune or bad moments then your good or bad timing of "buying" more will not be reflected in the unit values.

I think the right way to do it is to add units to the portfolio regularly mirroring the extra cash you may have in your bank account. To me that is the moment the cash enters the portfolio even if it is not invested yet. When you don't invest the extra cash you are choosing to increase the portfolios cash position and as such that should be contributing to the unit price. Then if you choose to invest it all later at some dip in the market the unit price rightly reflects your good or bad market timing.


Just to clarify, what I meant by 'Fund' is the total of all the investments in your personal selection of investments (say PSI for short).

However for simplicity, say that the PSI constituted just one fund, the 'Totally Wonderful Single Investment in Everything' Fund', or TWSIEF fund for short.

The TWSIEF fund's performance would be easy to track over time, however it would have a totally different history and performance from your PSI fund depending on when you added/subtracted to the PSI.

I would like the PSI unit value to reflect the performance of my PSI fund rather more than the TWSIEF fund. Later additions/subtractions should have a different effect than earlier ones - on the unit value especially. IMHO this would help me to better see how my PSI is doing. The conventional unitisation method produces a unit value that is pretty useless for me - unless I always add and never subtract when the results are identical.

nmdhqbc
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Re: unitisation

#219484

Postby nmdhqbc » May 4th, 2019, 11:43 am

I tried but failed to understand what your OP did. It did not make sense to me. But my suggestion of adding cash to the portfolio when it's available rather than when it's invested will I think help untangle the inconsistency you wrote about earlier.

When I said "fund" earlier it was also in quotes. So I did not mean it literally. I just think of unitisation as an open ended fund pricing and I can buy or sell the fund at different times. My timing of buys does not change the funds price performance but does change my own portfolios performance. So unitising my own portfolio should include all the cash I have at each moment. Then timing new investments gets included in the unit price like you want.

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Re: unitisation

#219491

Postby nmdhqbc » May 4th, 2019, 12:12 pm

How I think your second example should work below in brackets. I've assumed no interest on cash for simplicity sake...

1. Initial investment 10,000 (20000: 10000 of which is cash)
Unit Value (UV) = 100
Total Units = 10,000/100 = 100 (20000/100=200)

2. fund grows to 20,000 (10000 grows to 20000, 10000 cash stays at 10000)
UV = 200 (UV = 30000/200 = 150)

3. Added investment = 10,000 (10000 cash already in fund is invested)
UV = 200 (UV=150)
added units = 10,000/200 = 50 (no units added, cash already in portfolio)

Total units = 150 (200)
Fund value = 30,000(30000)

4. Fund value drops to 15,000
Unit value = 15,000/150 = 100 (UV=15000/200=75)

In reality the cash is more likely to arrive more gradually rather than all being there on day 1. So if the cash grew in your account between (1.) and (2.) there would be monthly purchases of units at the price of those days.

I think discussing unitisation is difficult in a forum. It's just too easy to be misunderstood.

mc2fool
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Re: unitisation

#219653

Postby mc2fool » May 5th, 2019, 12:22 pm

CliffEdge wrote:The problem is that with this method the fund value is now 15,000 but total investments are 20,000, that is a loss of 5,000 BUT unit value is still 100.

That's not a problem, that's the fact, and the unit value is not still 100, it's dropped to 100 from the 200 it was when you, unfortunately, added another £10K, and so you have a loss of £5K.

What you call a problem is exactly what unitisation is all about and meant to do; unitisation excludes the effects of cashflows (in and/or out) so that the performance of the fund itself can be measured against other funds and indices, independent of the vagaries of when investors added or took out money.

Now, in your case you are both the "fund manager" and the "investor" and you, understandably, want to include the effects of cashflows in your measurement of your overall performance, and what you need for that is the Excel XIRR function.

You give XIRR the £ amounts and dates of cashflows in and out of the "fund" and the £ value of it now (or on any given date) and it will tell you the annualised %age rate of return you've achieved. There's been plenty of discussion on XIRR on these boards, so start off by doing a search and reading up on it.

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Re: unitisation

#219760

Postby XFool » May 6th, 2019, 12:39 pm

mc2fool wrote:Now, in your case you are both the "fund manager" and the "investor" and you, understandably, want to include the effects of cashflows in your measurement of your overall performance, and what you need for that is the Excel XIRR function.

You give XIRR the £ amounts and dates of cashflows in and out of the "fund" and the £ value of it now (or on any given date) and it will tell you the annualised %age rate of return you've achieved. There's been plenty of discussion on XIRR on these boards, so start off by doing a search and reading up on it.

Just a quick post to point out the link given to the XIRR function might possibly confuse somebody not used to XIRR in a spreadsheet. This shows a typical business use of the function. An initial investment is made in some venture (-£1000) and this returns a series of positive cash flows (£100, £250 etc) to give an XIRR of 8%. This is the standard explanation of XIRR.

When used with an investment portfolio, as I use XIRR with my Premium Bonds, then you need at the end to include the current portfolio value as a cash flow.

Date 1 -£2000 Buy 2000 PBs
Date 2 £25 Winnings
Date 3 £50 Winnings
Date 3 £25 Winnings
Date 4 £2000 Current holding value - Calculate XIRR

The £2000 on Date 4 is not from winnings, nor yet is it any actual income, rather it is the current value of my PB holdings (or the portfolio value on that date) - as if I had sold them at that date and received cash for them. This has to feature as a cash flow in the XIRR calculation to get a meaningful result.

I am sure this is mentioned in the discussions of XIRR on LMF you refer to, but it is an important detail when used with a share portfolio etc.


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