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Why Unit Valuation should not be used to Compare Investment Performance
The following provides an example of why UVS should not be used to compare investment performance. Consider two investment clubs called, 'Gamblers United' and 'Steady Eddies'. Both clubs have 10 members, each contributing £100 per month in subscriptions to their club's investment fund and the starting unit value was £1.
Gamblers United get off to an excellent start with a high risk trading strategy and generated a Return On Investment (ROI) of £4,000 (400%) on their initial investment over the first month. Feeling lucky they applied the same strategy the second month and by the end of it, their ROI for the month was minus £3,000. For the remaining months of the year, Gamblers United simply broke even with an ending Net Asset Value of £13,000 and a Unit Value of £2.50; their actual profit was £1,000 against a total subscription of £12,000 by the club members, as shown in the following table:
Now let us take a look at the performance of the Steady Eddies club. The Steady Eddies got off to a bouncy start with a loss of £500 (50% of their first month's investment) before settling into a strategy that generated them a consistent monthly return of 5%. At the end of their first year, their unit value was £0.77, with an ending Net Asset Value of £15,062; their actual profit was £3,062 against a total subscription of £12,000 by the club members, as shown in the following table.
If you were to compare unit values for both clubs, at a glance you would assume that the Gamblers United with their 400% ROI on the first month and a final unit value of £2.50 had completely out performed the Steady Eddies. However the reality is that the Steady Eddies out performed the Gamblers United club, however their unit value was eschewed due to an early loss.
Although the Unit Valuation System is not a good metric for comparing performance between two separate entities, it is a very effective metric for evaluating month-to-month changes in asset value and therefore enabling the allocation of ownership based frequent subscriptions and withdrawals at intermittent time frames.
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