Run a private unit trust – an investment club

So, if being a unit trust manager is such a clever way of making money, how can private individuals get the same or a similar opportunity?

The one advantage of unit trusts over doing your own investing as an individual is that a unit trust gives you instant access to the widely spread portfolio that the unit trust manager has established. If your resources are limited this can be very useful, as it avoids the overexposure to a small number of shares in the early years of a portfolio.

In passing it is worth noting the number of people who hold shares only in their own company. This is the opposite of good portfolio management, which recom-mends that you hold a spread of at least 15 shares, so that if one bit goes wrong it may be balanced by another bit doing well. Not only that, but if you only have shares in your own company, if the share price goes south it could presage your job going west.

Investment clubs offer a neat way of gaining the benefit of a portfolio without losing control of the investment strategy, or paying the fees of the professionals.

I have to declare an interest here. I have been the treasurer of an investment club for its lifetime of five years. It is a steady, some would say boring, club with simple objectives. It is a long-term savings scheme for its members and the bench-mark it attempts to beat is the performance of the average unit trust as reported on Saturdays in the Financial Times.

The beauty of investment clubs is that they are essentially informal. They have almost no expenses, since none of the people involved in running the club are paid.

But this informality must be balanced by a well drawn-up constitution and rules.

You may obtain these easily from such organisations as Proshare in the UK or the National Association of Investors Corporation in the USA.

What happens is this. A group of up to 20 people, neighbours, friends, col-leagues or members of the same golf club, for example, agree to form an investment club. Some clubs have as few as three or four members. One of the members gets hold of a sample constitution and rules, understands them and writes the first de-scription of the club for other prospective members to read.

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During an inaugural meeting a number of significant issues are discussed and decisions made in the following areas:

• Office bearers. The club needs a chairman, a secretary and a treasurer. The treasurer is highly significant in the club as he or she will keep the records of the portfolio and all transactions.

• Number of meetings per year. Some clubs meet monthly and others less often. It depends on the subscription income and, to some extent, on the social aspects of the club. Some clubs are primarily social and will meet frequently to socialise as well as make investment decisions. Others are more serious in terms of the objectives of the club and the likely level of the fund as it grows. In any case there will be an annual general meeting.

• How members are elected. Probably new members will be proposed by existing members and their invitation to join ratified at a monthly meeting.

• Subscriptions. The members must decide on the amount of the joining fee, the upper and lower limits of monthly subscription, and upper and lower limits on lump sum investments. I have seen clubs with monthly subscriptions as low as

£20. The average for our club is about £95 per month, with the lowest sub

£50 and the highest £250.

The rules also need to be clear on how the portfolio is valued for purposes of buying units in the fund, or selling units back in order for a member to realise some or all of his or her holding. Normally this valuation is made on the last day of the month and the price used is the mid-price of each share as quoted in the Financial Times.

Members of an investment club need to have a common goal for the building up of the portfolio. Individual reasons for being in the club may be very different, but the investment goal needs to have the support of everyone. It is probably useful to set it fairly wide. Taking that goal into account, individuals can then calculate an appropriate subscription amount.

The investment strategy is the next important step. This should certainly in-clude the level of risk to be taken. The members must agree what proportion of

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money is to be invested at low, medium and high risk, and what they mean by those risks. Our club is a savings scheme so more than half of the money is invested in FTSE 100 companies.

If some members are less interested in the nitty gritty of investment decisions, they may leave that to others or even to a sub-committee; but the people with the delegated authority to make such decisions will be bound to operate according to the strategy or to go back to the whole membership if they wish to suggest changes.

The members, or the sub-committee, then choose shares in the way that the members have agreed. Some strategies are no cleverer than sticking a pin in the Financial Times, or using members’ knowledge of their own industries as a guide.

Here is a summary of a more logical way of team share choice.

• Using their knowledge and observation they choose a sector for investment.

• Using their strategy and current spread of the portfolio they choose the correct level of risk.

• Using the price/earnings ratio and yield they identify some four or more shares which are in the category defined in the first two steps. They get the annual reports of these companies. They probably action one or two members to do the evaluation work.

• Using published information they discuss the company strategy.

• From the same information they calculate the key business ratios, discuss whether they support the business strategy and possibly compare them with industry averages.

• They finally evaluate whether they believe the managers of the business can carry out the strategy successfully and make a decision.

In five years, 20 of us have built up a fund of £130,000, and, touch wood, we regularly beat the average unit trust over one, three and five years.

If we take the periods to June 6 1999, just as an example, we beat the average unit trust as follows.

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We have not been immune to the huge bear market though and the value of our investment has fallen dramatically. Time will tell if we can repeat this competitive performance in hard times as well as good. I suspect we will.