TYC – A Nightmare For Return Calculations

The Tyco restructuring caused momentary chaos as our performance engine faced for the first time a simultaneous reverse split and double spin-offs.  Those early Covestor members holding Tyco would have faced wildly differing return calculations on July 2nd.  Eventually by the close of the following day the analytics teams had co-ordinated the solution with engineering so we can manage that eventuality again without raising an ‘exception’.

For those not holding Tyco – the situation was TYC closed at approx  $34 on June 29, underwent a 4:1 split and then spun off two subsidiaries COV and TEL.   TYC closed on July 2nd at approx $53, TEL at $40 and COV at $43.  Our challenge was to accurately represent the separate weighted daily returns for TYC, COV and TEL .

Others faced the same issue – but  adopted different  methodologies:  the problem in this approach is what value you assign to COV and TEL – an issue we first faced post launch with the Morgan Stanley / Discover spin-off.  We chose to use the opening price of COV and TEL to compare to the pre-split price.  Which had the advantage of reflecting the different returns for the now new companies for the day.

Regardless it is comforting to know that even the largest brokerages have been struggling with it this week.