Hi Michael,

Thanks for replying. I think I've muddied the water unnecessarily.

There is an accelerated profit squeezed into a short time period on B,
but when the base costs for A are adjusted correctly, this is offset by
an accelerated loss on A (which is what I'd neglected to think about).

Although the individual pnl for the 2 positions don't make too much
sense, i.e. B gets a
huge gain in a single month, this is offset by A's dramatic loss in the
same month. The
two aggregated positions do make sense. I have checked this in
Microsoft Money, and
the numbers in aggregate do make sense, and do provide a realistic
calculation of return on capital in aggregate, even within a narrow
time window surrounding the corporate event (which is what I was
worried about).

I think I can live with this.

Thanks for your replies.
Julian.

Michael Gordon wrote:
- quote -

On 6 Oct 2006 03:10:26 -0700, "Julian" <jules[at]julesfrancis.co.uk> wrote:

- quote -


My point of view, operating from the US, is as follows:

I am primarily interested in the appreciation of my entire portfolio, so
allocating bases based on my initial investment in the primary company serves
that purpose.

Being perhaps also interested in the appreciation of the new company's stock, I
will accept that there will be an error if the time frame includes the date of
purchase of the new stock. In that case, I will obtain the relevant figures
another way.
--ron

Not a misunderstanding, Julian -- just a difference of perspective. From my
point of view, what you're doing is making a distinction without a
difference. The basis for performance is -- for me -- the same as the basis
for taxes. If I invest in stock A -- and stock A subsequently morphs into A,
B, C -- the performance I care about is that of my original investment. So,
I don't see a need to track two different bases. You could, I guess, elect
to track performance basis by ignoring the allocation of cost basis in
spinoffs, but I don't think you can track both.

--
Michael Gordon


"Julian" <jules[at]julesfrancis.co.uk> wrote in message
news:1160129426.231998.45330[at]i3g2000cwc.googlegroups.com...
- quote -

Folks,

Having given this matter some thought, I have come to the conclusion
that demerger corporate events cannot be handled correctly in Microsoft
Money.

My understanding is that the demerger option in money merely operates
by adding shares at a certain basis cost. The problem with this is
which cost does one use?

For the newly created share, there seem to be two costs that are
relevant. One cost is the actual basis cost of the position from a tax
point of view. The second relevant cost is the cost of the position
using the market price on the first day of trading.

If you take the first view, the gains from a tax perspective are
correct, as I admit is also the lifetime to date profitability of the
position. But it has the effect of accelerating the profit of the
position into a small timescale making a nonsense of performance
reports (when broken down by individual periods). If you take the
second point of view, the performance reports are correct, but the gain
from a tax perspective is incorrect.

Let me give an example:
I hold a share for a couple of years which appreciates by 50% over that
course of time. In the previous month, a demerger event occurs and I
receive a number of shares in a new company.
If the basis cost of these shares is taken to be from a tax position,
then that 50% gain is accelerated into a single month giving an
absurdly high monthly return on capital. If one ensures that the cost
of the position is the price from the first day of trading, the monthly
return on capital report makes sense, but of course the cost of the
position no longer corresponds to the cost from a taxation point of
view.

I wondered if anyone else had a point of view on this; if my line of
reasoning is correct, it implies every position really needs two costs,
one is the value of the position from the time that the new position
was created, and a second cost representing the basis cost of the
position from a tax point of view.

It seems to me that if you use Microsoft Money you have to make a
choice as to which you want to track: profitability per unit time
(month or whatever), or gains which are correct from a tax perspective.

I am writing from the United Kingdom, where demergers are not treated
as sales, but the basis cost of the old position is apportioned to the
two new positions in a manner agreed with our tax authority; although I
understand the tax treatment is similar in the United States.

I am a bit of a geek, and I like to track my portfolio profitability by
each month and quarter, and look at how profit is distributed over
different time periods; I use it to track and try and estimate share
and portfolio volatility. So maybe this doesn't affect too many people!

There have been many posts on the topic of demergers in this board, but
they all seem to focus on getting the correct basis cost for the new
position, which has the unfortunate side effect of accelerating
previous gains (in the old position) into the time period immediately
following the new position, giving absurdly high returns on capital.

Any thoughts? If I'm labouring under a massive misunderstanding please
put me right!

Regards,
Julian.