Hi all,

I too have always had difficulty understanding that write up.  I have finally gotten further clarification.  Here's the long version describing the index.  I will work on it to simplify it when tax season gets over, but at least it gives you something to chew on for now:

On 1/1/2001, the club index club started with $10,000. That's important, because it is the basis for all future calculations. No more money was put into the fund. The question the Club Index is asking: If we asked all the Bivio clubs how to allocate this $10,000, what would they do? To answer that question, we came up with a formula: Allocate based on the top 50 holdings by dollar value of all clubs. That's a reasonable proxy, because we are using the maxim: where did they put their money?

The other question we were asking is: What would be the ROI on the $10,000 over time? That's different from say the S&P 500, which is simply a value-weighted index, which is rebalanced based on the current capitalizations. That's interesting, but it doesn't ask the question: how would we have done if we had followed the S&P's advice in allocating our portfolio with a fixed pot of money to start with. It's a subtle distinction.

The fund is rebalanced once a month to simulate the fact that investment clubs normally rebalance once a month.

Basically, the fund represents a club that started in 2001 with $10,000 and never put in any more money.  Each month, they change the percentage of each of their investment holdings to reflect the top 50 holdings of the majority of bivio clubs at that time, weighted by their percentage of ownership.

In order to demonstrate the process, let's get some definitions:

* PortfolioValue = value of the Club Index portfolio on any given day, initially $10,000

* TotalHoldings = sum of top 50 stocks held by all clubs by dollar value

* Held(ticker) = total dollar value of "ticker" held by clubs

* Price(ticker) = price of "ticker"

* Shares(ticker) = shares to buy for Club Index

Let's do the example with 3 holdings today:

* Held(XON) = $25,000, Price(XON) = $85

* Held(MSFT) = $50,000, Price(MSFT) = $55

* Held(GSK) = $25,000, Price(GSK) = $42

TotalHoldings = $100,000

* $10,000 * Held(XON)/Total(XON) / Price(XON) = $10,000 * $25,000/$100,000 / $85 = 29.41 Shares

* $10,000 * Held(MSFT)/Total(MSFT) / Price(MSFT) = $10,000 * $50,000/$100,000 / $55 = 90.91 Shares

* $10,000 * Held(GSK)/Total(GSK) / Price(GSK) = $10,000 * $25,000/$100,000 / $45 = 55.56 Shares

Computed Club Index Holdings:

* Shares(XON) * Price(XON) = 29.41 * $85 = $2,499.55

* Shares(MSFT) * Price(MSFT) = 90.91 * $55 = $5,000.05

* Shares(GSK) * Price(GSK) = 55.56 * $45 = $2,500.20

Total Dollar Value of Club Index = $9,999.8 (we use more decimal places in the actual computation).

Let's say the next month, none of the Bivio clubs changes their positions in these stocks, but the price of the stocks change as follows:

* Price(XON) = $80

* Price(MSFT) = $50

* Price(GSK) = $50

The Club Index PortfolioValue would change accordingly:

* Shares(XON) * Price(XON) = 29.41 * $80 = $2,352.8

* Shares(MSFT) * Price(MSFT) = 90.91 * $50 = $4,545.5

* Shares(GSK) * Price(GSK) = 55.56 * $50 = $2.778.0

PortfolioValue = $9,676

That's the total amount of money we get to spend now. Essentially, we cash out every month, and buy new stocks with the cash we have as a result of the sales.

We now go back and calculate ratios of the top 50 holdings of the clubs. They have changed by the price of the stock only in our example. In the real world, clubs are buying and selling over the course of a month. Since we are using total dollar value, it doesn't matter for the computation. All we need to know is at the end of the month, what are the total value of each of the top 50 holdings of all clubs.

In this case, we can just calculate the percentage change from the price of the top 50 stocks:

* Change(XON) = $80 - $85 / $85 = -5.88%, Held(XON) = $25,000 + $25,000 * -5.88% = $23,530

* Change(MSFT) = $50 - $55 / $55 = -9.09%, Held(MSFT) = $50,000 + $50,000 * -9.09% = $45,455

* Change(GSK) = $50 - $42 / $42 = 19.05%, Held(GSK) = $25,000 + $25,000 * 19.05% = $29,763

TotalHoldings = $98,748

We now apply the same formula:

* $9,676 * Held(XON)/Total(XON) / Price(XON) = $9,676 * $23,530/$98,748 / $80 = 28.82 Shares

* $9,676 * Held(MSFT)/Total(MSFT) / Price(MSFT) = $9,676 * $45,455/$98,748 / $50 = 89.08 Shares

* $9,676 * Held(GSK)/Total(GSK) / Price(GSK) = $9,676 * $29,763/$98,748 / $50 = 58.33 Shares

Computed Club Index Holdings is now:

* Shares(XON) * Price(XON) = 28.82 * $80 = $2,305.60

* Shares(MSFT) * Price(MSFT) = 89.08 * $50 = $4,454.0

* Shares(GSK) * Price(GSK) = 58.33 * $50 = $2,916.50

PortfolioValue = $9,676.10

Laurie Frederiksen
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