Qualiport

How to properly account for your investment returns.

Accounting for the movement in your portfolio is often either ignored or done completely incorrectly. If you are not doing it properly, you will never know the true returns your portfolio actually achieves. While many people may think it is fine to know that they made £x profits and losses during the year, if they actually find out that this amounts to only a 5% gain after costs, they would have been better off leaving their money in the building society. On the other hand, it they earned 10% per annum return, they'd have been better off investing in a tracker fund and spending their spare time reading books rather than the share price pages of a newspaper.

Last Friday, we bought our second Qualiport share, EMAP. The total cost, including all brokerage and stamp duty charges, was £4,043.37. This is the amount of new cash that we are adding to our existing portfolio, which was worth £5,978.30 at the close of business last Friday. The way to account for it properly is to use a system called Value Per Share (VPS) -- this is the same basic system that unit trusts use to account for their portfolios, which deal with constant inflows and outflows of money. Here's the theory, and how it works.

We did not start the Qualiport with a set amount of money. The reasons for this are relatively straightforward. We didn't have £10,000, £20,000 or £50,000 sitting around in a bank account waiting to be invested in the stock market. Our online model portfolio is designed to show you that, hopefully, it is possible to beat the indexes by buying and holding shares in quality companies. The process to get to the stage of identifying a company in which to buy shares can be long and drawn out. We need to get to know as much as possible about our company before we consider parting with our hard earned cash. We didn't want to be under any pressure to invest all our money in a number of companies at once. This is an educational portfolio, and we wanted to share our findings and thought processes with you as it happened. By adding money to our portfolio as we go along, this would replicate what any individual investor would do. It's not often, if at all, any of us get any sort of windfall payment that we've got the luxury of investing in the market all at once.

So, money is periodically added to your portfolio, and sometimes it may need to be withdrawn. You may decide you want to go on a cruise down the Nile, or you may want to buy a new car. By canny investing over a long period of time, you've hopefully made enough money from your investments that it is time to enjoy some of that wealth you've accumulated. And why not? You can't take it with you, and it's not much use when you're pushing daisies upwards.

This may be possible scenario. You might have started this year with £10,000, grown your portfolio a little bit, added £2,000 in March, taken out £1,000 in July to pay for a Barbados holiday, added back a £750 bonus and now have the current value of your portfolio sitting at £12,350. So how have you done? How would you measure your return against the Indexes?

The key is to assign to your portfolio an initial Value Per Share. The figure you start with is completely irrelevant and can be any number at all. For the Qualiport, we chose 500p as our starting value per share. If you remember back to the purchase of Rentokil back in December, our initial cash outlay including charges was £4,040.63. We split that -- purely for tracking purposes only and nothing to do with the number of Rentokil shares we bought or their purchase price -- into 808.126 shares at 500p each. By the end of 1997, the Rentokil shares were worth in total £4,131.60 and this, divided by our 808.126 shares gave us a Value Per Share of 511.25p. The growth in the portfolio, measured by the total pound value was 2.25% (4131.60/4040.63), and likewise measured by Value Per Share (511.25/500) was the same. So far so good.

Whilst we only had one share in our portfolio, the calculations were easy. We didn't really have to split up our portfolio into imaginary shares, but we knew that we would be adding cash at sometime in the future so it made sense to start out using the VPS system.

At the close of business last Friday, the value of our one share portfolio was £5,978.30. We still had 808.126 imaginary shares, giving a VPS of 739.8p. Compared with our 500p starting point, this gave us a gain of 48%. On Friday evening, we added £4,043.37 in cash to our portfolio in order to buy our EMAP shares. This money in no way increases or reduces our overall return. It is simply added to our pot, and since it did nothing to affect the returns we've already made on Rentokil, it doesn't affect the performance of our portfolio. We bought 546.57 more imaginary shares at the current imaginary price of 739.8p leaving us with a total of 1,354.7 shares. Our portfolio worth is now the Rentokil value of £5,978.30 plus the new cash of £4,043.37, which equals £10,021.67. The number of imaginary shares is now 1,354.7, leaving us with an imaginary VPS of 739.8p -- identical to the value before we purchased EMAP. The new money has correctly left our returns unchanged. From there, we calculate what the total value of our portfolio is on any given day and divide it by our imaginary 1,354.7 number of shares to give us a VPS. To work out the portfolio's growth, we take the current VPS as a percentage of our initial VPS, and voila.

This may be heavy reading, but it is important to know exactly where you stand in respect to your overall returns. As we are running an online portfolio, we think getting the accounting right is one of the most important things we do. Each Wednesday and Friday when the Qualiport report is updated, the returns to date are also updated using the VPS system. Make sure you check out tonight's numbers to see the theory in action.

Next Step

On Friday, I want to start looking at the Qualiport credentials of Irish pharmaceutical company Elan Corporation PLC. Quoted on the US stock exchange as an American Depositary Receipt (ADR), Elan is a research based drug delivery and biopharmaceutical company. Its drug development programme is aimed at finding treatments for central nervous system diseases and disorders. That means things like Alzheimer's disease, epilepsy and Parkinson's disease. This is no bio-tech start up company, as Elan's full year 1997 revenues were US$389m and its net profit US$180m.

In the meantime, as ever, please feel free to take full advantage of our wonderful message boards. Anything you don't understand or want to comment on, the stage is yours.

Keep Fooling,

Bruce Jackson (TMFGoogly)

Qualiport Numbers

Today's Numbers          Date  22/04/98

          Change     Bid
          pence       £

RTO        0.06      3.93
EMAP       0.20     12.15


Rec'd        #     Stock      Buy      Now    % Change   £ Change

19/12/97   1565  Rentokil     2.55     3.93     54.1%        1.38 
17/04/98    337  EMAP     11.85    12.15   2.5%        0.30 


19/12/97   1565 Rentokil  4,040.63  6,150.45 52.2% 2,109.82 
17/04/98    337 EMAP   4,043.37  4,094.55    1.3%       51.18 


Total                               10,245.00 



               Day    Month   Year   History

Qualiport      1.6%   4.4%   47.9%    51.3%
FTSE 100      -0.4%  -1.4%   15.5%    18.1%