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How to unitise your portfolio

How to unitise your portfolio

Deciding to unitise your portfolio allows you to consistently track and compare investment performance, regardless of capital flows.

The process to unitise a portfolio is:

  1. Choose an arbitrary initial “unit” price.
  2. Calculate how many “units” your portfolio initially contained using the formula:
[Unit Count] = [Initial Portfolio Value] / [Initial Unit Price]

Key definitions

  • Initial unit price – an arbitrary number you make up to act as a basis for comparison.
  • Portfolio value – the market value of the portfolio you wish to monitor for performance.
  • Unit Count – the number of units that your unitised portfolio contains.

What is unitisation?

Unitisation is a technique that converts the value of an asset or portfolio into “units”, the performance of which can then be tracked and compared with benchmarks or across asset classes.

Why unitise your portfolio?

If you have ever wanted to compare your returns against published benchmarks or the performance of investment managers then you are going to need unitisation.

Comparing investment returns across different asset classes or portfolios can be challenging. This is particularly true when the investor draws down capital or makes additional investments.

Unitisation allows investment performance to be tracked and compared irrespective of capital flows.

How to calculate unitised performance?

Tracking and comparing unitised performance requires the recalculation of the unit price based upon the current value of your portfolio.

The formula for calculating the current unit price is below.

[Current Unit Price] = [Current Portfolio Value] / [Unit Count]

To determine the portfolio performance you simply calculate the percentage change in unit price:

[Percentage Change] =  ( [Current Unit Price] - [Initial Unit Price] ) / [Initial Unit Price]

Now you can compare your portfolio’s performance to benchmark returns.

How to adjust for capital flows?

Capital flows do not impact the unit prices that you are using for monitoring and performance comparisons.

Capital flows do result in a change in the number of “units” that you hold. The calculation for that is:

[Unit Count Adjustment] = [Capital Flow] / [Current Unit Price]

To recalculate the total number of “units” held just apply the adjustment to your previous unit count.

[Revised Unit Count] = [Unit Count] + [Unit Count Adjustment]

How to handle fees, dividends, rent, taxes, etc?

For unitisation purposes treat portfolio related cash flows as capital flows.

Wherever income, regardless of source, remains within the portfolio treat it as a capital inflow, which increases the number of units held.

If an expense is met from within the portfolio then treat it as a capital outflow, which reduces the number of units held.

Illustrative example

I want to compare the performance of an investment property against the S&P500 Price Return over 2017.

Asset class comparison

Asset class comparison. Image credit: Sean Kenney.

First calculate the number of units held at the start of the comparison period, using an arbitrary unit price of 100.

[Units] = [Initial Portfolio Value] / [Unit Price]

[Units] = [£672,000] / [100] = 6,720

The net income generated by the property partially supports my cost of living, so there are no capital flows to adjust for.

Next calculate the unit price at the end of the comparison period.

[Current Unit Price] = [Current Portfolio Value] / [Unit Count]

[Current Unit Price] = [£684,000] / [6,720] = [101]

Finally determine the annual return.

[Percentage Change] =  ( [Current Unit Price] - [Initial Unit Price] ) / [Initial Unit Price]

[Percentage Change] = ( 101 – 100 ) / 100 = 1%

The S&P500 price return in 2017 was 19.42%.

The investment property price return during the same period was 1.00%.

Based upon that analysis the property underperformed during 2017.

Once inflation has been accounted for this property’s value actually declined in real terms 2017.

Next Steps

  • Unitise and compare your investment performance across asset classes.
  • Analyse how you performed compared to industry benchmarks.
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