Calculate Convertible Returns

Set Up Dynamic Fields for Convertible Returns

Once the initial configuration steps are complete, setting up convertible returns is fast and easy. You merely need to create a dynamic performance field as you normally would, except you need to set the field effect to Convertible Return.

A 10 year dynamic return set up for convertible processing follows in the following figure.

Note that when the category is set to Performance, one of the available effects is Convertible Return. Choose this option and the field calculates and displays a convertible return for all funds that have convertible relationships established.

Notes and Hints

• Convertible return fields display a standard (non convertible) return for standard (non convertible) funds.

• If a performance period is LESS than the anniversary period PACE calculates a return without a conversion.

• Standard return fields display a standard return for convertible funds. This allows you to calculate both a standard and convertible return in the same report.

• Convertible returns are supported for each of the three core return types: pre tax, post-tax and post liquidation.

• Convertible returns are processed without loads.

• Conversions are considered to be a non taxable event.

• You do not have to create convertible fields for every performance period. Just create fields for the periods that exceed your firm's conversion policy. For example if funds convert after 5 years, there is no need to build a 1 year convertible field because the conversion is never triggered.

Troubleshoot Convertible Returns

The report log contains all the information you need if you wish to troubleshoot a convertible return. You commonly use the Submit with Override feature to:

• Remove all funds except the one you are troubleshooting

• Change the error log setting to level 10

When you resubmit the report, the error log includes the highest level of detail available for dynamic mutual fund performance fields. Because the logs can grow to be very large depending on the number of report fields, Eagle strongly encourages only running level 10 reports for one fund at a time.

Specific details are available for troubleshooting convertible returns:

• Identify fields that have convertible processing enabled.

• For each convert from fund, the log shows the Entity id of the convert from and convert to fund. If any overrides were applied for anniversary period/frequency

• For each convertible field the log shows the:

• System settings for anniversary period/frequency

• Derived anniversary date

• System settings for conversion baseline/calendar

• Derived conversion date

• In the calculation details the logs shows show all pertinent dynamic processing for each day including entity id, buy price, sell price, share balance and so on. On the conversion date you can see the details switch over to that of the "convert to" fund.

• If you accidentally set up convertible relationships whereby a circular reference exists, PACE displays an error in the log (nested conversions with a circular reference are not supported).

Information is also present in level 9 log reports for convertible return fields with a fund conversion that occurs within the report date range. For more information, see Use Performance Analysis Engine Logs.

Convertible Calculation Example

The example in the next section can provide insight into how PACE calculates a convertible return. Before looking at the example, review the following general information about the calculation.

1. If report has dynamic fields where effect = convertible.

2. Determine convertible relationships for all funds in report.

3. Interpret system settings for anniversary period/frequency.

4. Interpret system settings for conversion baseline/calendar.

5. If you set Sys Item 14 to 3 (Day Adjusted Month End of Following Month):

   • If the Daily flag for the derived conversion date is selected in the conversion business calendar identified in Sys Item 15, then use that date as the conversion date.

   • Otherwise, if the Daily flag for the derived conversion date is not selected in the conversion business calendar identified in Sys Item 15, then find the next day with the Daily flag selected and use that date as the conversion date.

6. Look for entity level overrides for anniversary period/frequency.

7. Query NAV/fund accounting data for all funds.

8. For each fund/field combination determine the anniversary date and conversion date.

9. Calculate returns:

   • Use the convert from funds NAV data from the start date of the performance period up through the end of day on the conversion date.

   • On conversion date, fully value the convert from fund including any accrued distributions that have not yet been reinvested.

   • Use the market value of the convert from fund (EOD conversion date) to buy shares of the convert to fund using the buy price as of the conversion date.

   • Use the convert to funds NAV data from conversion date up through the end of the performance period.

   • Use the ending market value to calculate the return.

Basic Return Example

In its simplest form, a standard (non-convertible) mutual fund return involves gathering the daily NAVs and distributions for a fund and processing them through an algorithm. Two basic examples that illustrate the standard performance calculation for two unique share classes follow. See the following figure.

For each distinct fund you invest $1,000 on the start date using that day's NAV. Then you reinvest any distributions that occur during the period. Lastly, you take the ending residual value and calculate a return.

Convertible Return Example

Now (using the same data as above) calculate a convertible return assuming that FUND B converts to FUND A after 2 days. Conceptually you need to start with the FUND B NAV stream from start date 12/31/06 up through the conversion date 1/2/06 and then convert the end of day value of FUND B into shares of FUND A and then complete the return calculation using FUND A data.

The following table provides sample data for a convertible return where Fund B converts Fund A after two days.

Conceptually, you invest $1,000 on 12/31/06 in FUND B resulting in ownership of 100 shares. Then, since the performance period (3 days) is greater than the conversion rule (2 days) a conversion is in effect.

Therefore, at the end of day 2, take the accumulated market value in FUND B ($1030) and invest it in FUND A. $1,030 invested in FUND A at the 1/2/07 NAV of $46 results in ownership of 22.3913 shares [100.9804 shares @ $10.20 is same as owing 22.3913 shares @$46]. Then you complete the performance calculation using the FUND A NAV data and the new share balance of 22.3913 shares.