Partnership NAV and Deferred Tax component

[Parsad]

That's pretty darn good!  I know Francis uses Citibank, and they charge something like 0.2-0.25%, and he's got over a billion dollars and hundreds of investors.  I can understand such a low rate for a huge book of business like that, but I'm surprised by how low Commonwealth's number is for less than $10 in AUM. 

 

How late was the NAV report on a few occasions?  Because we have only 15 days to file from month end, and we need everything provided to us usually in the first week of each month to file on time.  Also, do they handle funds outside of Ontario?  We file in BC, so I don't know if they do that.  If you don't know, that's ok and I can call them. 

 

Thanks!  Cheers!

[returnonmycapital]

Francis does use Citibank but he gets charged only 0.10% with something like 60,000+ investors, if memory serves. Citibank answers the phone with "Chou Associates..." which is a higher level of service than Commonwealth offers me. But they do want Francis' business, so maybe they would step it up for him. I use Burns Hubley for audit and Owens Wright for legal, like Francis. In fact, Francis is really responsible for my fund, he's the one that kicked me in the pants to start one.

 

I have had NAVs come in two weeks after the valuation date. But, I don't have any real time constraints and they know that so I imagine I am the last guy they work on. They have some much bigger clients who use daily NAV so I imagine you won't have too much trouble. I imagine they would handle out of province funds. Give Alex a call.

 

 

[Parsad]

Thanks very much!  Cheers!

[Munger_Disciple]

For example, income from March 1st to March 31st:

 

10 Partners each have $100K invested:

 

Dividends $10K

Interest $10K

ST Gains $20K

LT Gains $50K

Unrealized Gains $100K

 

Simply divide the income totals by 10 and allocate.

 

April 1st...new partner puts in $100K...distributable income is now divided by 11 partners.  Does not partake in any of the previous income except for the unrealized gains when realized.  Yes, NAV is inflated by unrealized gains, but it does not impact investor unless realized or fund liquidated.  Over a long-period of time, the effect is relatively negligible.  Cheers!

 

Parsad,

 

In your example, if you realize the $100K gain (that was unrealized on April 1st)  in April, 11th partner will be allocated a portion of the realized gain even thought his investment may not have gone up in value (i.e., similar to mutual fund situation). Is this correct?

 

I do agree that over a longer period of time, this effect is negligible. And you are doing it way better than mutual funds anyhow.

[hyten1]

Parsad,

 

In your example, if you realize the $100K gain (that was unrealized on April 1st)  in April, 11th partner will be allocated a portion of the realized gain even thought his investment may not have gone up in value (i.e., similar to mutual fund situation). Is this correct?

 

I do agree that over a longer period of time, this effect is negligible. And you are doing it way better than mutual funds anyhow.

 

yes the 11th partner realized the gain but this 11th partner paid for it through the nav, after the gain nav does down

[Parsad]

Yup, that's correct.  You can find other ways to avoid the taxes, but there is always the chance that the IRS or CRA will deny you the way you treated the income.  We would rather play well within the rules, than run the risk of our partners getting reassessments years later. 

 

If you could control the emotions of the average investor and get them to invest only when markets are down, then naturally that would be to their benefit.  Unfortunately, human psychology doesn't work that way and investors often want to invest after big runs in markets.  The cost of doing that is they may be purchasing some unrealized gains.  The corollary is that some investors who buy when the fund is down, may be benefitting from unrealized losses that actually discount their shares. 

 

Partners should contribute to their accounts somewhat regularly (monthly, semi-annually, bi-annually).  That will eliminate some of that bias over time.  Cheers!

[Munger_Disciple]

Hyten1,

 

You are missing the point I was making regarding the 11th partner in the example. If realized gains are assigned to him, he owes taxes even if his total account value may not have increased. As Parsad rightly pointed out, these effects (positive or negative) average out over the longer term.

 

[bookie71]

that's why you never buy a mutual fund in December, they are about to distribute LTCG, STCG and dividends.

[nodnub]

that's why you never buy a mutual fund in December, they are about to distribute LTCG, STCG and dividends.

 

Sorry, I am a bit confused.  Would the following be true?  If you buy a mutual fund on Dec 31 after a really bad year... are you likely to be assigned some capital losses that you did not actually suffer from?

 

[bookie71]

Actually the tendency seems to be to sell the big gainers.  After a big downturn in the market, as a tax preparer, I spend a lot of time trying to explain to folks why they have a big capital gain when the value of their portfolio dropped by XX%

[bookie71]

P.S.  Remember the funds are on a "cash" basis and only recognize the gain or loss when it is actually "realized".  When you invest you are buying the "recognized" gain or loss.

[JEast]

Though the question below probably needs a new message thread, I will ask it here.

 

For the existing small AUM managers out there, have any considered the associated costs with a single year audit versus the normal comparative years audit? My understanding is that the comparative years audit will increase your costs for the entire audit $1-$2K ($US). I ask because I keep hearing Warren and Charlie's voices in the back of my head saying do not pay extra for aesthetics. Any comments?

 

 

Cheers

James

[Parsad]

Hi James,

 

We do single year, and it is cheaper than comparative year.  You can always send the investor previous year annual reports and they can do their own comparative.  The audit is there to provide the partner with an unbiased view of the year's results and to make sure controls are in place when the accounting is done.  Anything else is as Buffett and Munger say...esthetics!  By the way, we don't have any pictures in the report, nor will we ever...and it's in black & white.  Cheers!