Investment club software

Investment club accounting software is typically used to manage:

• Member subscriptions
• Ownership/unit valuation system
• Investment transactions
• Financial reports
• Income/expenditure transactions
• Performance reports
• Manage tax returns

Member subscriptions

Investment clubs are groups of people who meet up on a regular basis to make investment decisions, which are typically associated with stock market investments. On a periodical basis investment club members contribute to an investment fund, typically via monthly 'subscriptions'. Investment club accounting software provides a means of tracking and managing monthly subscriptions made by each club member.

Allocating ownership

Investment clubs tend to use one of three methods for managing the allocation of ownership, profit and loss for investments that an investment club makes.

The first method is based on simple equal ownership, whereby each investment club member contributes exactly the same amount per month on the same day.

The primary benefit of using an Equal Share Ownership percentage scheme, whereby each club member contributes an equal amount on a fixed date each month, is simplicity. The challenges with an equal share ownership scheme, are what happens if a club member:

• can not make a monthly payment
• makes a late payment
• needs to withdraw money
• wishes to increase or decrease their monthly contribution
• is new and can not afford to pay the historical monthly subscriptions that have been paid by legacy club members

The second approach is the optional allocated ownership scheme. This allows individual investments, right down to individual parcels of stock, to be assigned to one or more investors on a percentage basis. Any investments which are not assigned specific ownership splits are assumed to be pooled as they would be under Equal Share Ownership above. Systems using this approach will segregate income and expenses associated with the individual investments according to the ownership tables for a clearer. An important advantage of the Optional Allocated Ownership scheme is that it allows for the representation of the differences in contribution levels that may emerge over time.

Another approach used is the Unit Valuation System (UVS). The primary benefit of using a UVS is flexibility to make varying subscriptions or withdrawals at any point in time and it addresses the shortcomings of the equal share ownership scheme. An important challenge of such a system is that it relies upon the timely revaluation of all investments to arrive at the unit values. This introduces significant manual processing in cases where valuations are not automated, however most modern Investment Club Accountancy products provide real time automated stock market portfolio valuation therefore overcoming this challenge.

Investment club accounting software should provide a means of managing either an equal share ownership scheme, optional allocated ownership scheme or a UVS.

Investment transactions

Typically in an investment club has between 10 and 20 members. Only the club treasurer or a limited number of club traders will actively manage the club investments. A solution is therefore required to enable all club members have visibility of the investment club transactions, without for example any potential issues with club members having to log on to the investment club's brokerage account.

Financial reports

Financial reports should ideally include the ability to generate transaction reports and financial statements for defined periods of time. Typical financial statements include Investment Transaction History, Income & Expenditure statements, Member Unit Valuation & Ownership reports, Balance Sheet, Income Statement and Cash Flow.

Income/expenditure transactions

Investment clubs typically generate expenditures over and above normal brokerage charges. For example an investment club may rent a room for club meetings, or use profits/subscriptions to pay for a meal for club members. If a club is using a UVS to track performance, typically non-tax deductible or non-investment related expenses are excluded from the unit value calculations through a process referred to as unit cancellation.

Performance reporting

Investment club software should provide members with a clear report of the club's performance. Performance reporting, as the name would suggest, is primarily concerned with reporting investment performance using a variety of metrics that can be generally classified as Money Weighted Return or Time Weighted Returns metrics. Secondary performance metrics commonly used are Profit and Loss, Asset Allocation, Dividend Yield, Sector Weighting, Investment Types, Performance Comparison to market indices, stocks etc.

Performance reporting should not be confused with financial reporting, such as the generation of Balance Sheet, Cash Flow and Income Statements. Financial reports reflect the state of a set of accounts at a specific point in time, and not their performance over a defined period of time.

Time Weighted Returns (TWR) are a means of measuring portfolio performance over time, independent of the amount invested or withdrawn. Most importantly, TWR results are independent of investor contributions and withdrawals and therefore yield a result that reflects the performance of the investments themselves. This also makes the TWR measure ideal for comparing the performance of various portfolios, advisors or fund managers.

Money Weighted Return (MWR) metrics another measure of investment performance for a portfolio. Unfortunately the MWR measure is not suitable for comparing the performance of portfolios as the results of the formula are dependent on investor contributions and withdrawals. Some money weighted returns metrics such as internal rate of return do enable the evaluation of corporate financing decisions, but none are suitable for investment portfolio performance evaluation.

Manage tax returns

In the UK, investment clubs are required to submit an HM Revenue and Customs tax return called Form 185 to HMRC for each club member each tax year. Form 185 provides a statement of the club's income and capital gains, along with the member's proportionate share of those income and gains. The allocation of gains is typically calculated using the UVS.