Return Calculation Methodology

Transcription

1 Reurn Calculaon Mehodology

2 Conens 1. Inroducon Local Reurns Examle Reurn n GBP Examle Hedged o GBP reurn Examle Cororae Acon Facors Tyes of Cororae Acons and how hey are deal Handlng of ax on cash dvdends... 6 APPEDICES: Aendx A Formulae... 7 Reurn Calculaon Mehodology

3 1. Inroducon The Freedom Index ams o rovde free, oen and ndeenden ndexes for he asse managemen communy. Ths documen shows all he mehodologes used o calculae reurns for he Freedom Index. The Freedom Index calculaes reurns n local currency and GBP and hedged no GBP reurn where arorae. The Freedom Index also comues and dsrbues Cororae Acon Facors (). Ths documen wll oulne he formula used for each and how hey are ncluded when calculang reurns. Reurn Calculaon Mehodology 1

4 2. Local Reurns Local reurn s he ercenage change n rce over he me erod beng measured, where rces are hose gven on he sock exchange he comany s beng raded on. Ths reurn doesn nclude a currency reurn. The reurn s calculaed as follows: Where: r r 1 = he reurn over erod -1 o. = he rce of he secury a me. 1 = he rce of he secury a me Examle Comany XYZ s beng raded on a sock exchange. A me -1, has a rce of 23. A me, he rce of he secury has changed o Therefore he reurn over he erod -1 o s 5.2%: 24.2 / 23 = ( ) x 100 = 5.2% Reurn Calculaon Mehodology 2

5 3. Reurn n GBP The reurn n GBP s calculaed as he reurn n he local currency mulled by any currency reurn, ha s, he reurn ganed on he changng exchange raes o GBP. The Freedom Index uses WM/Reuers exchange raes o calculae all he reurns n GBP. For all UK secures, he reurn n GBP wll be he same as he local reurn. The formula s as follows: Where: ( ) ( ) = reurn n local currency = currency reurn = reurn n GBP 3.1 Examle The local reurn of comany XYZ has been calculaed as 5.2% and he currency reurn of local o GBP s 1.3%. Therefore he reurn n GBP s 6.6%. ( ) ( ) Reurn Calculaon Mehodology 3

6 4. Hedged o GBP Reurn When calculang our hedged o GBP reurn, we n effec sell 1 monh forward noonal conracs a he sar of he measurng erod and hen calculae a reurn based on he gan or loss on hose conracs. The hedged reurn s hen calculaed n a smlar way o he reurn n secon 3: Where: ( ) ( ) = reurn n local currency = neres rae dfferenal (beween relevan currences) = hedged reurn oe for low neres rae currences here wll be a benef of hedgng and he hedged reurn wll be greaer han he local reurn and of course for hgh neres rae currences here wll be a cos of hedgng. 4.1 Examle Comany XYZ has a local reurn of 5.2% and he neres rae dfferenal for he erod s 0.3%. Ths leads o a hedged reurn of 4.9%. ( ) ( ) Reurn Calculaon Mehodology 4

7 5. Cororae Acon Facors When calculang reurns, he Freedom Index has o ake no consderaon any Cororae Acon Facors ( s) ha may have affeced he reurns ha were calculaed. 5.1 Tyes of Cororae Acons and how hey are deal There are many dfferen yes of cororae acons, he followng able shows he calculaon mehod The Freedom Index assgns o each. CORPORATE ACTIO TYPE Cash dvdend (ncludng bonuses, secal dvdends, reurn of caal, caal gan, exra, lqudaon Sock dvdend wh cash aymen Sock dvdend or cash aymen Sock dvdend Sl Consoldaon Rgh offerng Sn-off Issuer Bd Par value change Caal reducon Caal reaymen for eques CALCULATIO METHOD Cash dvdends Sock dvdend and cash Sock dvdend or cash Sock dvdend Sl Consoldaon Rghs ssue Sn-off Buy Back Sl/Consoldaon Sl/Consoldaon Cash dvdends The formula for each calculaon mehod can be found n Aendx A. As can be seen some cororae acons, alhough dfferen n mlemenaon, are deal wh n he same way. For examle, a sl and a sock dvdend are boh deal wh by nroducng a equal o he shares a me dvded by he amoun of shares a -1 even hough hey are dfferen acons. If here s more han one cororae acon on a sngle day, searae calculaons wll be made Reurn Calculaon Mehodology 5

8 for each. The roduc of each acon wll hen be used as he for calculang he new reurn. All s are aled n he followng way: Where: r r 1 = reurn over he erod -1 o. 1 = Cororae Acon Facor o be aled. = he rce of he secury a me. 1 = he rce of he secury a me -1. If any maeral errors are found we wll correc wh mmedae effec. 5.2 Handlng of ax on cash dvdends In he UK he cash dvdend s calculaed as beng ne of ax and n he US s calculaed as gross of ax. Ths s due o he dfferen counres ax jursdcons on cash dvdends. In he UK gross sands for he acual cash dvdend lus a ax cred ha can only be clamed by a rvae (non-nsuonal) nvesor, whereas n oher ax jursdcons gross s he fnal aymen ha s receved by an nsuonal nvesor. Therefore usng he cash dvdend ne of ax n he UK and gross n he US he reurns roduced wll be hose ha an nsuonal nvesor would see f assvely nvesng. Reurn Calculaon Mehodology 6

9 APPEDIX A Formulae CORPORATE ACTIO TYPE FORMULA Cash dvdend (ncludng bonuses, secal dvdends, reurn of caal, caal gan, exra, lqudaon Sock dvdend wh cash aymen Sock dvdend or cash aymen Sock dvdend Sl Consoldaon Rgh offerng Sn-off G If G If dv ( Cash G ) Cash, Then 1 Cash dv, Then ref If < hen [( ( 1 I ) I ref ) / 1] Else = 1 B ( Cash Issuer Bd Par value change Caal reducon Caal reaymen for eques Cash G B 1 ) 1 Cash 1 Reurn Calculaon Mehodology 7