Investment Club Ownership Criteria For Investment Clubs In Zambia

 

$       Investment Club Ownership Criteria

An account should be kept for each member of the club showing: the total investment made by each member by means of subscription, initial lump-sum and/or additional purchases of units, the total of withdrawals made by each member who has sold back units to the club; the total number of units currently held by the member and the current value of his/her holding.

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 is simplicity.

The challenges with an equal share ownership scheme are what happens if a club member:

ق      cannot make a monthly payment

ق      makes a late payment

ق      needs to withdraw money

ق      wishes to increase or decrease their monthly contribution

ق      is new and cannot 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. It allows for the representation of the differences in contribution levels that may emerge over time.

A third 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. 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 Policies  

Our club should also have an investment policy to guide how we make decisions on investments. This policy should be supplemented by the strategic plan, which lays out how much money we want to make (investment returns), how we will make it (investment vehicles), and how we will raise the funds to invest (saving, deals, reinvestment of interest/profits/dividends and or joint business).

It specifies investment goals and acceptable risk levels. It is a “road map” that guides all investment decisions.

The investment policy for our club should, at a minimum, lay out the following:

Risk Return Model: Investment is about seeking the most returns, at the least risk. This means our club must analyse all options presented for investment, by members, or non members, based on risks expected, and the return projected, and not on emotional likes and dislikes of the members. We should remember the advice of Warren Buffet, “investment is most rewarding when businesslike.” To understand risks in various investments, we should read the various books on investment vehicles and one of the leading texts is Invest: Rwoth Ramogi’s Guide to Financial Instruments & Alternative Investment Products, which lists all the investment vehicles available, and risks of investing in each.

Investment Amounts: there should be clear policies on the amount to be invested (monthly investment fees); how they are collected (via payment to bank account to minimize risk of loses); and when they are collected (first week of the month). Further, in case of default, there should be clear penalties (fine for non investment, for partial investment, and for late investment) and there should be a provision for non-members to invest, (their contributions should be considered as loans to the club, payable with interest within a given time period).

Stop Loss Policy:  The club should have a stop loss policy to prevent further loss of revenue and returns. For instance, if an asset class depreciates in value to 20%, it should be liquidated.

Investment Committee:  our investment club should have an investment committee/finance committee, which in tasked with analyzing the investment propositions, by both members, and non members, and giving a final opinion within a fixed amount of time to prevent endless discussions on investments. In addition to the investment committee, we can have several investment teams to promote compliment ability, and provide new ideas to handle any given resource.  The best timeline is usually one month, or less. Once again, Invest: Rwoth Ramogi’s Guide to Financial Instruments & Alternative Investment Products lists the various due diligence issues to consider when considering investments in various vehicles and asset classes. The investment committee should be appreciated, through gifts, and or a percentage of the investment outcome. In cases where there are various investment committees, the best performing committee should be appreciated with incentives.

Investment Process: there should be a clear process on how investment ideas can be proposed (there should be a written document/email on every investment idea), and by whom (ideally, every member should be tasked to propose idea at least once every month). Then, to which office are proposed ideas directed (ideas should be sent to the investment committee, or investment team leaders, where the club has various investment teams). Further, once proposed, on what basis are they analyzed, (risk and return model, based on the clubs strategic plan and expected earnings should guide the decisions etc), and who participates in the analysis of ideas (this should be the investment committee, which can call external experts if need be). In addition, there should be clear provisions on timeline for discussing and accepting an idea (this should be within two weeks, or shorter, depending on the opportunity). We should read Invest: Rwoth Ramogi’s Guide to Financial Instruments & Alternative Investment Products, which has criteria for due diligence when investing in various vehicles.

Investment Ideas/Deals: the investment club should have a policy for all members to propose an investment project, business deal, and or to invite non members to submit investment proposals, including ideas for funding, every month. Any member who does not actively participate in seeking out investment opportunities is a let down to the club, and should be encouraged to pull up their socks, and be helped to seek out deals, and or generate investment ideas. This is one area where continuous learning, through guest lectures, and or reading books/watching movies, and or joining industry associations like a national investment clubs association or venture capital association, or a business idea lab, is an added advantage.

Reinvestment Policy (Dividend Policy): an investment club should clarity whether its foundation is growth or income. If the purpose is to grow, then all investment returns, whether in form of interest or dividend should be reinvested for a given period of time; but if the focus is income, then dividends should be issued. However, unless members are old, and need constant income, the investment club should practice the principle of dividend reinvesting /compounding, to increase the power of money to make more money. And if the members really need ‘something’ to show progress, then the club can purchase for members gift hampers every end of financial year from earnings, as part of expenses (hence not taxed), so as to build member morale as happens in cooperatives.   

Investing In Members: the clubs should also make it possible for members to borrow money (for investment, not personal uses). This should be accompanied by provision of security, guarantees, and or postdated cheques, together with a clearly written contract for loan of money, and repayment schedule. Once again, Invest: Rwoth Ramogi’s Guide to Financial Instruments & Alternative Investment Products has a draft loan/borrowing contract that can be used. However, the club needs to relax and lower interest rates, and loan processing fees, in line with the spirit of togetherness since the borrower this time is ‘family’. To this extent, the investment club is well advised to have a member loan facility as an independent investment vehicle/product.

Safety of Principal:  Safety of principal is the foremost objective of the club. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. Investments should be made with judgment and care, prudence, discretion and intelligence exercised in the management of the club’s assets.

Investment Restrictions: The clubs should indicate what types of asset classes, or investments, are restricted from investments. These can include prohibited substances, alcoholic substances, or investing in high risk instruments like hedging, futures and swaps. It can also include not investing in certain geographies, or companies, due to various reasons, including political, or ethical grounds.

Liquidity: The club investment portfolio will remain sufficiently liquid to enable the club take advantage of arising investment opportunities. Portfolio liquidity is defined as the maturity or ability to sell a security on a short notice near the purchase price of the security. Liquidity shall also be assured by keeping an adequate amount of short-term investments in the portfolio to accommodate the cash needs of the club.

Sources of Investment Funds: The policy should indicate whether the club gets investment money from dividend reinvestment, monthly contributions, income of the club (from interest or dividends), or cash calls (that is, asking members to contribute lump sum amounts when there is an investment opportunity).

Nomination of Shares: Members should only nominate shares for purchase if attending a meeting. Members can only vote on club matters by proxy if they know in advance what is being nominated or proposed, this to be confirmed in writing and submitted to the club secretary through email, or to any other officer. Further, any member wishing to nominate a share for consideration should present some reasoning to support his nomination. Again, if possible, a member nominating buying of shares should give information prior to the meeting using the clubs web site mailing list. Before any stock is purchased or sold it will be required that all members of the investment club are part of the study of these stocks and part of the final decision. Investments may be made in blocks so as to satisfy the rationale of pooling. The club should also agree on the block amount for investment. However, the club is not bound to make purchases or sales at any meeting, and neither is it a must to purchase or sell in blocks.

Stop Loss Policy: The club should have a stop loss policy to prevent further loss of revenue and returns. The general policy is hence +20%. Generally, a share should be sold where it has gained or where a share price increases by 20% from the original purchase price a trailing stop loss to be set at 20% below the current price.  When a share price decreases by 20% from the original purchase price the share should be automatically sold without prior notification to club members.

Club's Portfolio: The Club's portfolio is determined by the members. A designated member deals with the Club's broker to execute buy and sell orders; the value of each member's share is determined by her capital contributions to the Club and the total value of the Club’s portfolio. There are Club accounting guidelines and softwares that will help with the bookkeeping, and make it possible to keep track of partners who invest different amounts each month. An Investment Club depends on the involvement of all its members; there are no silent partners in successful clubs. Everyone should participate in an Investment Club. The only requirements are a willingness to work and participate; and the ability to get along with the other members of the Club. Members should make a long-term commitment, and the partners usually decide to include a clause that addresses the early withdrawal of funds (other than in the case of unusual circumstances). The liquidation value (if you said, ‘get me out of this Club and give me my money back') of most Clubs will often be less than the capital contributions of its members during the first year or two. For most clubs, members contribute USD 50 for starting, monthly.  The investment club should agree on what percentage of portfolio value should be in any one category, sector or industry. As a rule, the club should not hold more than 20% of the assets in one single sector. The club should diversify between cash, debt, equity and derivatives, as well as alternative assets.  The club should also diversity in alternative market as well as main market sector of the securities exchanges.

Find herein attached a Draft Investment Policy, covering these and other issues. The rule of thumb is never to make any decision on investments without consulting investment policies.

 

 

$       Accounting & Tax

€       Investment Club Tax

With the right group of people an investment club can be both a profitable and enjoyable venture. However, the business end of investment clubs is not completely fancy-free and there is much club members will have to familiarize themselves with in terms of investment club tax if we want to maintain a legal, operating investment club. The club will have to have its own Employer Identification Number ‘EIN’.

EIN is a universal way of referring to a legal entity's corporate equivalent to a Social Security Number. Remember that a partnership can employ either a partner, or a non-partner, and as an employer, it must have a Social Security Number for inter alia, withholding taxes on employees. It is hence imperative that the club register from the social security administration office. These help to avoid any future tax problems.  The next step I will need to do is determine whether my club is a corporation or a partnership. In a partnership, I am taxed on individually, whereas in a corporation, I am taxed twice, both as the corporation, and on the income I carry home as earning on capital (capital gain) either dividends, or interest. In either case however, both corporation and or partnership, all partners/shareholders, need to have tax numbers, or Personal Identification Numbers (PIN), for the purposes of tax payment.

However, I can recall what Robert Toru Kiyosaki writes is his best selling classical book, Rich Dad Poor Dad, that the essence of registering a legal entity is to make sure that I can defer all my expenses to the corporation/partnership, and so declare less profits, and so pay less taxes, legally!

In a partnership, the concept of 'flow through taxation' finds life, and every individual will file own returns, and that means that on top of the partnership having its EIN, the partners need to have their own PINs. So long as the expenses and income are calculable, and there is profit, then there will be taxation, even if there is no distribution of profits. 

£        The Two (2) Investment Club Accounts (Asset Accounts Vis-À-Vis Management Accounts)

Investment Club Account allows members to pool their savings and invest to become rich. However, while pooling money to invest, the investment club incurs costs, and hence the need for a clear accounting system that clearly reports on costs. An investment club ought to have two accounting systems: asset account, and management account.

$       Asset account is the account that reports purely on the performance of the assets, outside the expenses used to run the fund, and only addressed costs related to investment, such as cost of capital, taxes on capital gain and dividends, or interest, etc; and investment expenses such as payment to advisors, stock brokers, and bank fees.

 

$       Management account is the account for management expenses, including compensations to member officials, communications, transport costs, and other related expenses not directly in reference to the asset base.

Members agree on a monthly contribution based on their disposable income.  Members also sign a constitution or bye-laws governing their investment club.  The sole purpose of an investment club account is to save money for the purpose of future investment. An investment club account is NOT a gifting circle or pyramid scheme which keeps recruiting members with the purpose of crediting the accounts of recruiters.

The clubs bank should be determined annually at the Annual General Meeting but may be changed by agreement of a majority of members at a Special General Meeting called in accordance with club rules.  All cheques drawn on the clubs account(s) should require any three of five authorized signatures. Where possible one of the signatories of the cheques should be the chairperson. In the event of one authorized signatory being unavailable for an extended period, the officers of the club may authorize a further signatory for the period involved. All income should be paid direct into the clubs bank account(s) except where members have approved an arrangement whereby their stockbroker retains funds from the sale of one or more investments pending the purchase of other investments.

£        Monthly Accounts

The accounts should be compiled on a monthly basis on the last day of the month using an accounting software package. These monthly accounts are reported in the following monthly meeting. The auditor’s reports should also be availed to members of the club. The report should also include the tax reports. The correct tax forms are issued by the member in charge of the taxation for the club, who should be the finance officer. The Finance Officer's monthly report should include as minimum the current value of each of the club's investments together with a total value of such investments, a statement of unpaid accounts and cash in hand on the aforesaid day, the total value of the club's assets and the current unit value which should be determined by dividing the total net asset value by the total number of units issued to members.

£        Investment Club Accounting Software     

Investment clubs deal with a lot of money, especially if it is one that facilitates investment partnerships among its members. Some of the accounting tasks are membership dues, paying dividends; distributing incomes, monitoring the exchange of shares, recording individual gains and losses, and more.

We need to be equipped with the proper accounting tools so that when our club grows, we are flexible enough to grow with it. Whereas manual accounting would have the finance officer do each step of a complicated system, automated accounting does the entire process in just a fraction of the time- freeing up time to handle more important matters, reducing errors, and making the investment club operations smoother and easier. Accounting software is a technology made for an investment club.  

 An investment club accounting software can handle individual and organization-wide transactions effortlessly. Accounting for dividends, individual contributions, one-off contributions, and the club’s total capital would no longer be something that would make us want to tear our hair out. Additionally, these software programs do not just account for the finances of the group. Because it is a technology made for an investment club, the club accounting software is expected to manage the organization as well.

This means that it keeps track of the members effectively whether they are newcomers or outgoing affiliates. The software would make sure that each member is synced with an investment portfolio so that individual activities are monitored accurately. Some accounting software even offer a feature that keeps the members informed of the club’s latest news.

An 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