Portfolio unitisation help

george4064

Hi all,

I've been trying to calculate the total performance of my portfolio, and I was hoping for some help.

The majority of my holdings are equities (individual stocks and investment trusts), so I am calculating total return as;

Total return = ((P1-P0) + D)/P0

P0 = initial price
P1 = ending price
D = dividends received per share

This is all fine, however one of my holdings (Optimal Payments PLC) underwent a fully underwritten Rights Issue in about April 2015. The rights issue was 5 new ordinary shares at 166 pence per share for every 3 existing ordinary shares.

This has obviously skewed the stocks price if you try calculate total return without adjusting either the old price or the new price. So I wanted to ask, whats the best to adjust either the old or new price to normalise them so I can calculate its total return over a 3 month, 6 month, 1 year, 3 year and 5 year period?

Once I have the total return for each of my holdings, I multiply them by my portfolio asset allocation to give an overall portfolio total return.

In general, if anyone has any other better ideas on how I can calculate total portfolio return please do say!

Thanks!

Linton

You method of calculation is not really very helpful or meaningful as it takes no account of the time period over which the different investments were held. Three ways of getting a meaningful number...

1) Use the IRR function in Excel - see google for examples of usage

2) Unitisation

You invent your own single fund, call it X.

Say you initially buy 100 share in A at a price of £1/share then you your investment is 100 units of X just containing 1 A.

1 year later A is worth £1.1. You now hold 100 units of X each of which is worth £1.1.

You buy 55 shares of B at say £1/share. That is equivalent to 50 units of X (50*1.1=55). So you now own 150 units of X each containing 100/150 shares in A and 55/150 shares in B.

2 years further on your total portfolio has gone up 10% so is worth £165*1.1=£181.5. ie each unit of X is worth £181.5/150=£1.21

So over the 3 years your annual rate of return is (£1.21/£1)^(1/3)=1.066, ie an average 6.6% return.

Unitisation seems complicated, but as long as you use it from the start and update the quantity of units each time you make a purchase or sale it's straightforward. Dividends are handled simply by keeping a cash component in X.

3) Use suitable software to monitor your investments - MsMoney will work it all out for you. I guess other investment tracking tools have similar facilities.

george4064

Thanks Linton, I have been thinking about treating my portfolio as a unit trust. It looks like unitization is the best way to go forward, I see what you mean about once it's all setup it's pretty easy to maintain.

Is it possible to backdate unitization? I.e. Create my fund 'X' starting at 1st January 2015? (I know all my cash movements, transactions, income etc between then and now).

Ive been reading this guide from monevator; http://monevator.com/how-to-unitize-your-portfolio/

Linton

george4064 wrote: »

Thanks Linton, I have been thinking about treating my portfolio as a unit trust. It looks like unitization is the best way to go forward.

Is it possible to backdate unitization? I.e. Create my fund 'X' starting at 1st January 2015? (I know all my cash movements, transactions, income etc between then and now).

In order to work out the effect of a buy or sell on your X fund you need to know the total value of the portfolio at the time. So if you have that info you can back date.

Note that my comment on dividends was a bit too superficial if you simply spend the dividends outside the portfolio. You could handle that by an increase in value of X and a change in composition to include the cash when you get the dividend and then a sale of the cash which reduces the number of units in X that you hold.

Share splits/consolidation which you mentioned in your OP can be easily handled by changing the composition of X leaving its value the same.

george4064

Linton wrote: »

In order to work out the effect of a buy or sell on your X fund you need to know the total value of the portfolio at the time. So if you have that info you can back date.

Note that my comment on dividends was a bit too superficial if you simply spend the dividends outside the portfolio. You could handle that by an increase in value of X and a change in composition to include the cash when you get the dividend and then a sale of the cash which reduces the number of units in X that you hold.

Share splits/consolidation which you mentioned in your OP can be easily handled by changing the composition of X leaving its value the same.

I just thought about that a bit more, and you're spot on, in that I'd have to know the value of my portfolio every time I added new money to the portfolio. Maybe something I can request but probably quite difficult.

I would've thought that any share splits/consolidation wouldn't have any abnormal affects, because it's all activity within the portfolio (I.e. No new money or money withdrawn). Am I correct in saying that?

All my dividends are re-invested, so when a dividend is paid I guess it would just show as an increase in portfolio value.

I guess I would only need to calculate the unit price of X every time I add/withdraw money and when I want to use it as a calculation point (month end for example). Is this correct?

Let's say for example I add £1,000 to my portfolio on 1st of October. When I calculate how many units of X that has bought, should I use the portfolios value excluding the £1k as at market close on 1st October? Then from 2nd October COB the price of unit X will include the £1k?

Apologies if I'm not making sense!

Linton

george4064 wrote: »

a) I would've thought that any share splits/consolidation wouldn't have any abnormal affects, because it's all activity within the portfolio (I.e. No new money or money withdrawn). Am I correct in saying that?

b) All my dividends are re-invested, so when a dividend is paid I guess it would just show as an increase in portfolio value.

c) I guess I would only need to calculate the unit price of X every time I add/withdraw money and when I want to use it as a calculation point (month end for example). Is this correct?

d) Let's say for example I add £1,000 to my portfolio on 1st of October. When I calculate how many units of X that has bought, should I use the portfolios value excluding the £1k as at market close on 1st October? Then from 2nd October COB the price of unit X will include the £1k?

Apologies if I'm not making sense!

a) Correct - it just changes the contents of X, not the number of X's you hold nor their value.

b) Seems reasonable - the total value of your portfolio goes up by the value of the dividend but the number of units of X remains the same, although the composition changes.

c) Buying or selling things included within X causes the change in number of units. Of course you could include cash as part of X and then when you put cash in from outside without actually buying anything you treat that as a buy, but buying of actual units is simply a transfer of cash to the chosen investment within X.

d) If you dont regard your portfolio as actually holding cash then you determine the value of each unit of X you held prior to the purchase, use that value to determine how many units of X you are buying and then ensure the new composition of X multiplied by the new number of units correctly gives your overall holdings.

george4064

I was planning on viewing the entire portfolio as X, the entire portfolio being my S&S Isa which will include any cash balance in the ISA.

Say for example price of X is £1.12000, portfolio value is £16.8k as at cob 1st October and I've got 15,000 units.

By adding £1k of new money to my ISA on 1st October, that will buy me 897.8571 units.

Let say market is flat, and my portfolio value as at cob 2nd October is the same plus the 1k, so £17.8k total. That's a 17.8k/15,897.8571 = £1.11965

So price of X as at cob 2nd October is 1.11965?

Linton

george4064 wrote: »

I was planning on viewing the entire portfolio as X, the entire portfolio being my S&S Isa which will include any cash balance in the ISA.

Say for example price of X is £1.12000, portfolio value is £16.8k as at cob 1st October and I've got 15,000 units.

By adding £1k of new money to my ISA on 1st October, that will buy me 897.8571 units.

Let say market is flat, and my portfolio value as at cob 2nd October is the same plus the 1k, so £17.8k total. That's a 17.8k/15,897.8571 = £1.11965

So price of X as at cob 2nd October is 1.11965?

You need to work things out to a few more decimal places:

Price of X=£1.12.

£1000 added. So units added = 1000/1.12=892.857142

So you have 15892.857142 units for a total of £17.8K
New price of X is 17800/15892.857142=1.12

So adding the cash hasnt changed the value of each unit.

george4064

Thanks a lot for your help Linton.

I'll take a snapshot valuation as at 30th Sept, to unitise my portfolio.

If I remember, I'll post any updates here

Thanks again.