Originally Posted by
DLax85
Thanks for your detailed response. But, I'm still uncertain I understand. How does the "hurdle rate: allow the Trust to continue to gain in value without passing that value on to us? How is it a stabilizing source in down years?
Your example states our pancakes "grow" when ROI > Hurdle Rate. But, isn't that "passing the value on to us"?
DLax
Okay, I'll take a crack at this.
If you give me $100, I promise to invest it and give you any gains over 5%. I get to keep all the gains that are 5% or lower.
Wooohooo, earned 10% this year. So, here you go, $5. What do you mean, you want the whole $110 bucks? That wasn't our deal, our deal is you get all of the gains over 5%.
Let's try this again,
Year 2. Man I sucked this year, only earned 4%. So, you get $0 and I get $4
IF our agreement was excess over 2%, year 1 you'd get $8 and I'd get $2.
Year 2 we'd split it.
Wicked simplistic, but hopefully understandable.
Much more complex when you convert the values of earnings into notional shares, and then base the increase\decrease of the notional shares on the ROI of the investments.
Much easier to understand a Mutual fund (or our B fund) where the percentage is actual cash converted into actual shares with prices based on the value of the owned assets. Rather than an earned benefit. Saying I've earned a benefit worth 2% of my salary is greatly different than saying there's been a 2% deposit into my 401k