Unitisation (?)

[monabri]

I've seen several HYPers making reference to "they've unitised their portfolio" (or words to that effect) to assess it's performance.

What is the basis for this? I can calculate things like internal rate of return in Excel but what are the advantages/reasons for the "unitisation" approach?

Regards
Monabri

next question would be - can anyone provide a simple example of the process

[JMN2]

Briefly, say you start a year with £100 and subscribe new money for £50 and the market doesn't move at all. You now have £150,unitisation adjusts things so you don't end up showing 50% return incorrectly. I recently accumulation unitised and all those new moneys coming in or going out are adjusted so I can just look at my unit price which now tells me what the return is ie how unit price has changed.

[OZYU]

I've seen several HYPers making reference to "they've unitised their portfolio" (or words to that effect) to assess it's performance.

What is the basis for this? I can calculate things like internal rate of return in Excel but what are the advantages/reasons for the "unitisation" approach?

Regards
Monabri

next question would be - can anyone provide a simple example of the process

Look at your PMs, I have given you a detailed write up to get you started.


Ozyu

[Breelander]

Unitisation strips out the effects of adding or taking out capital. Your IRR is unique to your particular investment timings. You can compare the unit value with others, or with an index. That's not possible with IRR.

This is often discussed, most recently here: viewtopic.php?f=15&t=3370

[vrdiver]

I've seen several HYPers making reference to "they've unitised their portfolio" (or words to that effect) to assess it's performance.

What is the basis for this? I can calculate things like internal rate of return in Excel but what are the advantages/reasons for the "unitisation" approach?

Regards
Monabri

next question would be - can anyone provide a simple example of the process

Unitization allows two different portfolios, constructed over different time periods to be compared. XIRR (in Excel) tells you your rate of return, but doesn't allow apples-with-apples comparisons with others.

For help with unitization, the Lemon Fool has provided notes and tools for us over at http://lemonfoolfinancialsoftware.weebly.com/

VRD

[Alaric]

Unitization allows two different portfolios, constructed over different time periods to be compared.

To coin a phrase, you could also try "with profitisation" . What you do is accumulate all new money in and money withdrawn at a target rate of return. If the current portfolio value exceeds the target accumulated value, you congratulate yourself on a final bonus. If it's under the target, you deem the loss a "market value adjuster".

Provided you have the dates of all cash flows in and out, it's probably marginally simpler to construct than unitisation.

[Arborbridge]

Unitization allows two different portfolios, constructed over different time periods to be compared.

To coin a phrase, you could also try "with profitisation" . What you do is accumulate all new money in and money withdrawn at a target rate of return. If the current portfolio value exceeds the target accumulated value, you congratulate yourself on a final bonus. If it's under the target, you deem the loss a "market value adjuster".

Provided you have the dates of all cash flows in and out, it's probably marginally simpler to construct than unitisation.

What on earth is all that about? And it's simpler than unitising? not if that "description" is anything to go by. As regards unitisation - particularly if I want accumulation units - there's is little to do and it could hardly be simpler.

[JMN2]

,,,

Provided you have the dates of all cash flows in and out, it's probably marginally simpler to construct than unitisation.

Well it must be very simple then because unitisation is just a simple spreadsheet with a couple of columns. When constructing historical number of unit changes an assumption I made was, as I had portfolio values for certain dates, to calculate a time-weighted linear intrapolation for any dates money was going in/out.

Now on my spreadsheet the final row is live and picks up current portfolio value and thus unit price. Any in or outflows that live row becomes static, unit change being calculated using the end of day value, and then I'll add another live row again to show live unit price.

I started 31/12/2009 with a price of 100, first 2-3 years my portfolio was very different from now, then I got more into HYPing, closed portfolio, then 2015 I started putting in new money (so my units have increased in number), no money taken out yet, unit value today is 161.98, xirr 6.88 live to date.

[Raptor]

Hi,

Here is a link to TLF Software set-up by kiloran and itsallaguess with a good unitisation piece,

http://lemonfoolfinancialsoftware.weebly.com/

Raptor.

[vrdiver]

,,,

Provided you have the dates of all cash flows in and out, it's probably marginally simpler to construct than unitisation.

Well it must be very simple then because unitisation is just a simple spreadsheet with a couple of columns. When constructing historical number of unit changes an assumption I made was, as I had portfolio values for certain dates, to calculate a time-weighted linear intrapolation for any dates money was going in/out.

Now on my spreadsheet the final row is live and picks up current portfolio value and thus unit price. Any in or outflows that live row becomes static, unit change being calculated using the end of day value, and then I'll add another live row again to show live unit price.

I started 31/12/2009 with a price of 100, first 2-3 years my portfolio was very different from now, then I got more into HYPing, closed portfolio, then 2015 I started putting in new money (so my units have increased in number), no money taken out yet, unit value today is 161.98, xirr 6.88 live to date.

Just a request for people to be careful when editing material they wish to quote. In the above, Alaric us the author of the text attributed to me!

VRD

[Gengulphus]

Briefly, say you start a year with £100 and subscribe new money for £50 and the market doesn't move at all. You now have £150,unitisation adjusts things so you don't end up showing 50% return incorrectly.

Neither does the internal rate of return! It sees cash inflows of £100 and £50, and a final valuation of £150, and produces the bank interest rate that would produce the same result - which unsurprisingly is 0%.

The way unitisation cancels out the effects of capital movements is subtler than that. To give an idea, suppose you and I both start with £1,000 and make a loss of 20% in year 1 and a gain of 25% in year 2. The only difference is that I'm unable to add more capital at the end of year 1, while you receive an inheritance of £10,000 at the end of year 1 and add it to your investments.

So I see my £1,000 shrink to £800 at the end of year 1 and then grow back to £1,000 at the end of year 2, for no net gain. And you see your £1,000 shrink to £800 at the end of year 1, have £10,000 added to it, producing £10,800, and then grow to £13,500 at the end of year 2, for a £2,500 net gain.

If one pushes those cash flows through internal rate of return (IRR) calculations, the results are:

Me: £1,000 in at start; no cash flow at the end of year 1; £1,000 notionally out at end of year 2; IRR = 0.00%
You: £1,000 in at start; £10,000 in at the end of year 1; £13,500 notionally out at end of year 2; IRR = 20.48% (*)

Are you that much better an investor than I am? Not on this evidence - easily the best explanation of use both losing 20% in year 1 and gaining 25% in year 2 is that we made exactly the same investment decisions, and so we are equally good investors! Your better outcome is not due to superior skill at making those decisions, but to you being lucky enough to have more money available to invest in the good year.

Using an initial unit value of £100, unitisation says that:

* I start by buying 10 units at £100 each; at the end of year 1, I have 10 units worth £80 each; at the end of year 2, I have 10 units worth £100 each.

* You start by buying 10 units at £100 each; at the end of year 1, you have 10 units worth £80 each and you buy another 125 units at £80 each; at the end of year 2, you have 135 units worth £100 each.

I.e. we both see the unit value go from £100 to £80 and back to £100, reflecting the equal quality of our investment decisions. What was different between us was the availability of capital.

And note that it's whether the capital is available that counts, not whether it's actually put into non-cash investments. E.g. if I'd instead also received a £10,000 inheritance at the end of year 1, but had decided that I didn't fancy the markets and put the £10,000 in a non-interest-bearing bank account, I really ought to count that bank account as part of my portfolio, and my IRR and unitisation calculations become:

IRR: £1,000 in at start; £10,000 in at the end of year 1; £11,000 notionally out at end of year 2, IRR = 0.00%

Unitisation: I start by buying 10 units at £100 each; at the end of year 1, I have 10 units worth £80 each and I buy another 125 units at £80 each; at the end of year 2, I have 135 units worth about £81.48 each.

And the fact that my unit value only rose from £80 to £81.48 reflects the poor quality of my investment decision to be very largely in cash for year 2.

(*) This is basically because if you'd had a bank account that paid 20.48% interest (one can dream, can't one?), you could have matched your overall performance by depositing your money in it: the initial £1,000 would have grown to £1000 * 1.2048 = £1204.80 at the end of year 1, when it would have been increased to £11,204.80, and it would then have grown to £11,204.80 * 1.2048 = £13,499.54. (The fact that this isn't exactly on the £13,500 target is just due to the fact that I've only quoted the IRR to 2 decimal places - it's actually very slightly above 20.48%. And incidentally, one can get a slightly different answer from a spreadsheet if one makes one of the gaps 366 days rather than 365 because of a leap year - my first attempt got 20.43% because I'd used 1/1/15, 1/1/16 and 1/1/17 as the three dates...)

Gengulphus

[Arborbridge]

Now on my spreadsheet the final row is live and picks up current portfolio value and thus unit price.

As JMN wrote (I think!). I also do this by putting a cell in the HYPTUSS so everytime it updates, I receive the latest income unit price. I also use the HYPTUSS as the basis on to which I add new units, with the aid of a couple of cells. This spreadsheet is saved under name referencing the date, Ticker and Number of shares. This makes it easy to check back for any obvious bloomers such as forgetting to unitise a particular purchase months ago, for example.
The HYPTUSS used daily is updated for the new shares and units and saved with the suffix "workaday" in the name.

One could do this for accumulation units too by having a cell for the cash float, but I have a portfolio account to do this for me and a running total of the number of units.

[monabri]

Thanks for the replies - I'm now "unitised" as of 31/03/17! I just decided to take my portfolio as on this date and unitise it.

I decided to simply take my portfolio value as at close of market and divide it by "x" such that the unit price was 100.00 (a nice round number).

I also had a look on YouTube and found this video which was also useful.

https://www.youtube.com/watch?v=7UKeA3HqDUA


(OK - the currency is South African Rand but the principle is the same).

[JMN2]

Thanks for the replies - I'm now "unitised" as of 31/03/17! I just decided to take my portfolio as on this date and unitise it.

...

You won't regret it!

[ADrunkenMarcus]

I was able to unitise my SIPP back to 2001, retrospectively. However, my dividend growth portfolio (mostly in an ISA) was harder and my units from that started in April 2016. I wish I'd done it earlier!

Best wishes

Mark.

[doug2500]

It sounds interesting, but the devil is in the detail!

Would you use accumulation or income? Income seems most appropriate for my non-ISA accounts which pay dividends into my bank while accumulation sounds best for my ISA's which hold income within them. Would this be a normal approach?

If I have holdings with a small number of brokers and fund houses as well as certificates would it mean valuing all of them every time I took some action? Alternatively do people just track every account or 'portfolio' separately? And can you then aggregate them somehow?

I'm not sure if it's for me, I'm trying to make things simpler and I'm not sure this would. At the end of the day if I get a XIRR of 20% and a FTSE TR index is up 10% I'm happy, even though it's not a straight comparison. A bit amateurish I admit, hence my interest.

Thanks,

Doug

[Breelander]

Would you use accumulation or income? Income seems most appropriate for my non-ISA accounts which pay dividends into my bank while accumulation sounds best for my ISA's which hold income within them.

Very much depends on what you do with your dividends. I am drawing income from my HYP, so Income Units are more appropriate. There's nothing to stop you calculating both though, remember that drawing income means 'selling' some of your Accumulation Units.

If I have holdings with a small number of brokers and fund houses as well as certificates would it mean valuing all of them every time I took some action? Alternatively do people just track every account or 'portfolio' separately? And can you then aggregate them somehow?

So do I. My HYP is spread across some certificates, several ISAs and non-ISA accounts. Indeed, some of my holdings are in more than one of them. Yes, you have to do a valuation each time it's needed, but I have all my holdings listed in a single spreadsheet (consolidating the various accounts before unitising it as a single entity) so that's relatively straight forward.

At the end of the day if I get a XIRR of 20% and a FTSE TR index is up 10% I'm happy, even though it's not a straight comparison. A bit amateurish I admit, hence my interest.

No, not amateurish. XIRR is a different tool with different objectives. It measures your own personal investment performance. But being dependent on your own timing choices it's not something you can easily compare with other investors, or benchmarks.

[doug2500]

Would you use accumulation or income? Income seems most appropriate for my non-ISA accounts which pay dividends into my bank while accumulation sounds best for my ISA's which hold income within them.

Very much depends on what you do with your dividends. I am drawing income from my HYP, so Income Units are more appropriate. There's nothing to stop you calculating both though, remember that drawing income means 'selling' some of your Accumulation Units.

Although I do try to reinvest my dividends it seems easier to go with income for my accounts that pay away the dividends. For my ISA's though I have no intention to remove money for many years so acumulation seems easiest as it negates the need to track dividends and decide on the timing of recognising them. While I can see the point of not recognizing dividends until they are reinvested, in my mind if they are sitting in my share dealing account as cash they are committed to my portfolio and I have made the decision to keep them as cash therefore they should be included.

If I have holdings with a small number of brokers and fund houses as well as certificates would it mean valuing all of them every time I took some action? Alternatively do people just track every account or 'portfolio' separately? And can you then aggregate them somehow?

So do I. My HYP is spread across some certificates, several ISAs and non-ISA accounts. Indeed, some of my holdings are in more than one of them. Yes, you have to do a valuation each time it's needed, but I have all my holdings listed in a single spreadsheet (consolidating the various accounts before unitising it as a single entity) so that's relatively straight forward.

What do you use? I have my shares and trusts on stockopedia so that would be easy, I also have a spreadsheet with a yahoo price scrape but neither include funds?

At the end of the day if I get a XIRR of 20% and a FTSE TR index is up 10% I'm happy, even though it's not a straight comparison. A bit amateurish I admit, hence my interest.

No, not amateurish. XIRR is a different tool with different objectives. It measures your own personal investment performance. But being dependent on your own timing choices it's not something you can easily compare with other investors, or benchmarks.

I just want a relatively easy way to track performance that is comparable to a suitable benchmark. I think trying to backdate unitisation would be impossible but now would be the time to start as I use tax years to analyse things.

I have unitised my records for a bunch of funds that I inherited, it was easy because I've never moved money in or out. My unit value rose by 74% compared with an XIRR of 6%. I've done it correctly because when I XIRR'ed the unit value increase it was also 6% (is this how people work out their annual gains, or just a straight percentage increase?). The XIRR of my holdings means more to me. I could make it easy for myself by selling all my funds but that would involve CGT and because I inherited them I have a (stupid) attachment to them despite them proving to be the lowest performing assets I have. I think I've just talked myself into it, I'll see what my CGT is like at the end of the year.

[tjh290633]

Would you use accumulation or income? Income seems most appropriate for my non-ISA accounts which pay dividends into my bank while accumulation sounds best for my ISA's which hold income within them. Would this be a normal approach?

If I have holdings with a small number of brokers and fund houses as well as certificates would it mean valuing all of them every time I took some action? Alternatively do people just track every account or 'portfolio' separately? And can you then aggregate them somehow?

I do both. Accumulation units give me a Total Return figure while Income Units allow me to compare dividend per unit against the RPI.

Also Income units give me a figure which I can compare with the normal version of the indices, and I consider the FTSE350 HY index (HIX) to be the most appropriate for an HYP.

If you have different sorts of holding, i.e. HYP, AIM, funds, ITs, then I would look at each separately. If you have similar holding in different places, then I would aggregate them for the unitisation purpose. At one stage I had my HYP split between a PEP and an ISA, because you could not amalgamate them. I considered them as a single account for unitisation purposes. It was a blessing when I was able to bring them together, because it meant that I could reinvest dividends in the best place once more.

TJH

[Gengulphus]

Would you use accumulation or income? Income seems most appropriate for my non-ISA accounts which pay dividends into my bank while accumulation sounds best for my ISA's which hold income within them. Would this be a normal approach?

You really need to make the accumulation-or-income-unit decision on the basis of what you want to know - do you just want to know the total return, which is what you get from accumulation units, or do you want to know the split between capital growth and income, which is what you get from income units (in the form of the income unit value and the "income per income unit" figure)?

If I have holdings with a small number of brokers and fund houses as well as certificates would it mean valuing all of them every time I took some action? Alternatively do people just track every account or 'portfolio' separately? ...

You need to decide what is 'inside' and what is 'outside' your portfolio, and to value your portfolio and do the unitisation calculations each time cash (*) moves between the two.

For accumulation units, treat dividends as appearing in principle 'inside' the portfolio, so there's nothing to do if they actually end up 'inside' and you need to do the unitisation calculations for the cash leaving the portfolio if they actually end up 'outside'.

For income units, treat dividends as appearing in principle 'outside' the portfolio, and regardless of where they actually end up, you divide the cash amount of the dividend by the current number of units and accumulate the result into your "income per income unit" figure. Then there's nothing more to do if they actually end up 'outside' and you need to do the unitisation calculations for the cash entering the portfolio if they actually end up 'inside'.

For the pretty standard set-up of a broker account which holds both shares and cash, with dividends paid into the broker cash balance, the easiest thing to do to regard both the shareholdings and the broker cash balance as 'inside' the portfolio and everything else as 'outside', and to calculate accumulation units. That way, you only have to do the unitisation calculations when you deposit cash into the broker account or withdraw cash from it. Buys, sells, corporate action payments and dividend payments are all entirely 'inside' the portfolio and everything else that you do with your finances is entirely 'outside', so none of them require anything doing about unitisation calculations.

Income units are rather more work for that set-up, because for them, the dividends appear in principle 'outside' the portfolio but actually end up 'inside' - so you have to do the "income per income unit" calculation and the unitisation calculation for the cash moving in for each dividend payment, with the latter requiring a portfolio valuation each time. Doing a portfolio valuation each time a dividend payment is made can get pretty tedious unless you automate it - I'll leave others to address the question of how to do that. Alternatively, if you're prepared to accept what will generally be pretty small inaccuracies, you can choose a period such as a month or a quarter, and treat all the dividends that arrive during the period as one payment. Ideally, you treat that payment as arriving in the middle of the period to minimise the inaccuracies, though that does have the drawback that the portfolio valuation needed for the unitisation calculation for a period needs doing mid-period, while the dividends total also needed for that calculation is only available at its end. Doing the valuation at the end of the period probably won't increase the inaccuracies all that much and means the whole job can be done at once.

Alternatively, you could treat only the shareholdings as being 'inside' the portfolio, with the broker cash balance and everything else being 'outside'. In that case, for accumulation units all movements of cash between the shareholdings and the broker cash balance (i.e. buys, sells, corporate action payments and dividends) are times that you have to value the portfolio and do unitisation calculations; for income units, the same goes for buys, sells and corporate action payments, but dividends just need the "income per income unit" calculation and accumulation. This might be a useful saving of work if dividends are sufficiently frequent compared with buys, sells and corporate actions. However, do note that it's actually calculating something rather different: basically, the performance of your shareholdings alone rather than of the shareholdings plus cash. Since the cash will almost certainly be producing a zero or near-zero return, the latter will generally be closer to zero than the former - only slightly closer if the cash is a small proportion of the overall value (as in a HYP), but it might be quite a lot closer for other strategies that involve more 'going to cash'...

The other standard broker set-up is that the broker account only contains shareholdings, but is linked to a bank account with payments for purchases and corporate actions that consume cash (e.g. taken-up rights) being debited to the account, and sales proceeds, other corporate action proceeds and dividends being credited to it. That makes it easiest to treat the shareholdings only as being 'inside' the portfolio and everything else 'outside', as in the last paragraph. Having the cash associated with the shareholdings 'inside' as well is possible, but either involves tracking which cash in the linked bank account is associated with the shareholdings and which with other things and producing notional payments between the two, or making it a dedicated bank account that is only used for that purpose, and through which all payments in and out of the portfolio are channelled. The former is possible, but involves a fair amount of error-prone work, so I strongly recommend the latter, which basically allows you to treat the linked bank account for that broker set-up as 'inside' the portfolio and so equivalent to the broker cash balance in the first broker set-up. It also incidentally works well as the 'buffer' account that is sometimes mentioned for smoothing out dividend income when you're drawing income, receiving all dividend payments and having a regular standing order of your monthly 'salary' into your current account.

A third, rather uncommon broker set-up is a CREST account, which has you directly on the company share register, meaning that dividend payments and some corporate action payments (and company communications) are normally (**) sent directly to you by the company, bypassing the broker - this is done to a bank account you've specified in a 'dividend mandate' to the company registrar, or by cheque if you haven't. This is basically like the second set-up above, except that you exert control over where the dividends, etc, go via the company registrar rather than via the broker; also, a CREST account may use either a broker cash balance or a linked bank account for the buys and sells.

Share certificates are similar to CREST accounts, except that you also do the actual holding of the shares and handle all corporate action payments yourself (e.g. takeover proceeds are handled by the broker with a CREST account, but by you with a certificate), leaving brokers only doing the buys and sells.

... And can you then aggregate them somehow?

You can aggregate separate ways of holding the shares - just use the combined set of the things that are 'inside' each as the set of things that are 'inside' the overall portfolio. But make certain you either do accumulation units on all of them or do income units on all of them: it might be possible to mix-and-match the two in some way, but even if you managed that, the figures that you would end up with won't be very meaningful!

As indicated above, setting up the right payment structure can make things quite a lot easier, especially by using one or two dedicated bank accounts as the linked bank accounts for brokers that have them and for dividend mandates from shares held in CREST accounts or as certificates. Accumulation units do tend to be easier, basically because they treat all payments in and out of the shareholdings identically, whereas income units treat dividend and non-dividend payments differently and it's basically not possible to streamline both completely. The flip side is that income units give you extra information that accumulation units don't - basically, the capital gain vs income split of the total return.

So essentially, you can have that extra information, but you have to pay for it with extra work - and only you can decide whether you value the extra information enough for it to be worth that price.

(*) Or shares or other investments, if you transfer them in or out of the portfolio - treat them as an amount of cash equal to their value on the day of transfer.

(**) I say "normally" because very occasionally, one goes via the broker - I've had this happen on a handful of occasions in the 17 years I've held my CREST account. I think it's caused by the payment catching shares being bought or sold 'in transit'.

Gengulphus