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Peer to peer lending
Jon Snow
Posted: 19 March 2017 23:53:41(UTC)
#23

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Jeez, this is an old thread, feel like I’m Indiana Jones getting the back story and facts.

I’m not yet convinced on P2P, with the quoted yield of 5% and the risk of default based on very simplistic algorithmic analysis, probably provided by Experian etc.

How does that compare with a 5.6% return from a really boring fund holding blue chip company bonds and UK Treasury gilts...

King Lodos
Posted: 20 March 2017 00:26:40(UTC)
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In essence they're just like Junk Bonds..

So in Zopa Classic, you'll have different risk categories, loan lengths and expected default rates, and they'll be paying anything from 2.7% to 7.4%. And you'll have £1,000 spread between maybe 50-100 borrowers?

Then daily/monthly payments just get recycled into new loans – or you can choose to take an income (certainly with RateSetter), where it'll just reinvest your initial capital.

Very similar to Junk Bonds .. Money's made if they get the risk assessment right.

If you take CCC rated Junk Bonds (which I imagine we both hold a few of), they can have annual default rates up above 20% .. So then they need to be paying something above 20% interest to make you money (discounting recovery rates, etc).

I thought it was interesting that New City High Yield had returned the same as Royal London Shrt Dur High Yield .. Which suggests at both ends of the risk/duration spectrum, the balance between yields and defaults is very fine.

What you give up with P2P is a degree of liquidity .. The opportunity may be simply that it's a newer market, which investors haven't been pushed into to the same degree as the bond market and dividend stocks .. In any of these markets, you're relying on risk and yield (earnings or dividend) being well balanced against each other.
1 user thanked King Lodos for this post.
Jon Snow on 20/03/2017(UTC)
xcity
Posted: 20 March 2017 00:38:57(UTC)
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Jon Snow;44804 wrote:
How does that compare with a 5.6% return from a really boring fund holding blue chip company bonds and UK Treasury gilts...

Blue chip bonds and gilts don't pay 5.6%, so what is the fund doing to give that as a return?
2 users thanked xcity for this post.
Jon Snow on 20/03/2017(UTC), john_r on 25/03/2017(UTC)
Micawber
Posted: 20 March 2017 09:33:42(UTC)
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Or, you could invest in P2P Global currently paying 5.6% and at a discount to NAV of 20%, with over half its earnings from the USA, and for a retail investor no problems with liquidity.... About time the tide turned on that one.
dyfed
Posted: 20 March 2017 09:54:50(UTC)
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Micawber;44816 wrote:
Or, you could invest in P2P Global currently paying 5.6% and at a discount to NAV of 20%, with over half its earnings from the USA, and for a retail investor no problems with liquidity.... About time the tide turned on that one.


I agree it looks tasty.....but I lost money on P2P on the way down, also lost about 50% on a US based p2p (forgotten it's name, probably Freudian) some 18 mths ago. Doesn't mean P2P not a good buy but not for me.....
Jeff Liddiard
Posted: 20 March 2017 10:10:00(UTC)
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Micawber;44816 wrote:
Or, you could invest in P2P Global currently paying 5.6% and at a discount to NAV of 20%, with over half its earnings from the USA, and for a retail investor no problems with liquidity.... About time the tide turned on that one.


If P2P Global were to be bought today at 786 and if it paid in 2017 the same 59p dividend for the 12 months it paid in 2016, am I right in thinking that the return would then be 7.50%?

Also, I can't find what the highest discount has been over say the last 12 months.

What am I missing here? Seems a no brainer to get 7.50%?

Remind me, what are the risks here, i.e interest rates defaults. Thanks
Jon Snow
Posted: 20 March 2017 10:58:19(UTC)
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xcity;44806 wrote:
Jon Snow;44804 wrote:
How does that compare with a 5.6% return from a really boring fund holding blue chip company bonds and UK Treasury gilts...

Blue chip bonds and gilts don't pay 5.6%, so what is the fund doing to give that as a return?


Nothing odd as far as I can see, it's this one -

http://www.fundslibrary....ser=hl_website_documents
Mr Helpful
Posted: 20 March 2017 12:07:31(UTC)
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Jeff Liddiard;44822 wrote:
Micawber;44816 wrote:
Or, you could invest in P2P Global currently paying 5.6% and at a discount to NAV of 20%, with over half its earnings from the USA, and for a retail investor no problems with liquidity.... About time the tide turned on that one.


If P2P Global were to be bought today at 786 and if it paid in 2017 the same 59p dividend for the 12 months it paid in 2016, am I right in thinking that the return would then be 7.50%?

What am I missing here? Seems a no brainer to get 7.50%?

Remind me, what are the risks here, i.e interest rates defaults. Thanks



2016 dividends 44.5p declining
Share Price today to buy 785p
Yield 5.66% based on 2016 dividends
The HL figure of 7.56% looks spurious

The main risks may be :-
- Race to the bottom on lending rates as the various lenders compete
- Resultant declining dividends as earnings cover worsens
- Credit quality may be deteriorating?

But at some price investors may be compensated for these risks?
2 users thanked Mr Helpful for this post.
Jon Snow on 20/03/2017(UTC), Jeff Liddiard on 20/03/2017(UTC)
Jon Snow
Posted: 20 March 2017 12:52:47(UTC)
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Mr Helpful;44834 wrote:

2016 dividends 44.5p declining
Share Price today to buy 785p
Yield 5.66% based on 2016 dividends
The HL figure of 7.56% looks spurious


Yes, always check the dividends actually paid and do your own calculation of yield.

Also the latest year dividends aren't covered.

P2P may be fine for some investors. Just not for me from a risk/reward perspective.
kWIKSAVE
Posted: 20 March 2017 15:58:33(UTC)
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Dyfed says it looks tasty

.... me thinks don't touch with a bargepole even a sterilised one

all too fiddly and uncertain
Richard T
Posted: 20 March 2017 20:44:58(UTC)
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Jon Snow;44804 wrote:
Jeez, this is an old thread, feel like I’m Indiana Jones getting the back story and facts.


Oops, "my bad", as I believe they say. Missed the date on the previous post!

Richard
1 user thanked Richard T for this post.
Jon Snow on 20/03/2017(UTC)
xcity
Posted: 20 March 2017 21:42:49(UTC)
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Jon Snow;44826 wrote:
xcity;44806 wrote:
Jon Snow;44804 wrote:
How does that compare with a 5.6% return from a really boring fund holding blue chip company bonds and UK Treasury gilts...

Blue chip bonds and gilts don't pay 5.6%, so what is the fund doing to give that as a return?


Nothing odd as far as I can see, it's this one -

http://www.fundslibrary....ser=hl_website_documents


OK.
First thing is that the 5.6% is the distribution yield not the underlying yield (running yield rather than redemption yield). Pays the 5.6% but the capital value is eroded.
Second, 63% of their investments are rated BBB or BB. I don't regard that as Blue Chip.
Third, the average redemption length is quite long. So rising interest rates will definitely mean reduced market value.
And they also use complex derivatives.
2 users thanked xcity for this post.
Jon Snow on 20/03/2017(UTC), Mr Helpful on 21/03/2017(UTC)
Jon Snow
Posted: 20 March 2017 23:33:28(UTC)
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xcity,

As usual, thanks for putting the alternative case (Socratic questioning at its best).

I’m not sure if we’re discussing the Alliance Trust fund vs P2P or just the Alliance Trust fund. So I’ve mashed up your post a bit for continuity and put my responses in bold (I tried italics and they didn't work, so I'm not being shouty).

First thing is that the 5.6% is the distribution yield not the underlying yield (running yield rather than redemption yield). Pays the 5.6% but the capital value is eroded.

The fund charges need to be paid somehow, whether that is taken from capital or income.

Second, 63% of their investments are rated BBB or BB. I don't regard that as Blue Chip.

Yes, “blue chip” doesn’t have a formal definition, investment grade would have been more precise and that includes BBB rated companies. By that definition the investment grade holding is between 80% and 84%, depending on the composition of the “other” 4%.

Third, the average redemption length is quite long. So rising interest rates will definitely mean reduced market value.

Quite right and as P2P loans are short term they are insulated, to some extent by rising interest rates. On the other hand as P2P loans are short duration and for P2P to work they need to recycle their money then as interest rates rise so P2P rates rise and (my interpretation) default rates will rise.


And they also use complex derivatives.

On the factsheet they state “The Fund holds investment-grade Sterling corporate bonds, government bonds, non-Sterling investment grade corporate bonds and relevant derivative instruments.“ I’m certain you know a lot more about derivatives than I do.

The original post was really about the risk/reward offered by P2P and that imo you could find better risk adjusted returns elsewhere. I haven’t done the numbers.

Someone on the forum probably has….

Maybe I’m a dinosaur and P2P is the future. I won’t be investing though.
Jon Snow
Posted: 21 March 2017 00:02:14(UTC)
#30

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King Lodos;44805 wrote:
In essence they're just like Junk Bonds..

So in Zopa Classic, you'll have different risk categories, loan lengths and expected default rates, and they'll be paying anything from 2.7% to 7.4%. And you'll have £1,000 spread between maybe 50-100 borrowers?

Then daily/monthly payments just get recycled into new loans – or you can choose to take an income (certainly with RateSetter), where it'll just reinvest your initial capital.

Very similar to Junk Bonds .. Money's made if they get the risk assessment right.

If you take CCC rated Junk Bonds (which I imagine we both hold a few of), they can have annual default rates up above 20% .. So then they need to be paying something above 20% interest to make you money (discounting recovery rates, etc).

I thought it was interesting that New City High Yield had returned the same as Royal London Shrt Dur High Yield .. Which suggests at both ends of the risk/duration spectrum, the balance between yields and defaults is very fine.

What you give up with P2P is a degree of liquidity .. The opportunity may be simply that it's a newer market, which investors haven't been pushed into to the same degree as the bond market and dividend stocks .. In any of these markets, you're relying on risk and yield (earnings or dividend) being well balanced against each other.


Yes,

Not sure that NCYF is much longer dated than Royal London, happy to be corrected.

I ran the numbers on the high yield bond funds, volatility, default rates etc. The Moodys review on historic default rates is very informative.

For obvious reasons default rates are currently low, even on junk bonds.

So if you take NCYF (as an example) or even Royal London and play with the credit ratings, holdings and default rates you can come up with your own VAR.

It may change, for now I'm happy to hold NCYF and bought into Royal London sterling extra yield.

Do you hold P2P and are you happy with the risk/reward and if so why.

King Lodos
Posted: 21 March 2017 02:50:53(UTC)
#37

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I've held 10% in Funding Circle, RateSetter and Zopa for quite a few years .. Cutting exposure to Funding Circle since they changed their terms.

It's been a great asset class so far .. I'm probably a little under 10% today, as I've not added to it in a while.

On my chart, P2P lending is just a straight line of 6-8% returns .. When I started I could get about 10-12% virtually default-free, but there are certainly more people piling in today, and I think the average loan I'm getting now is around 5%, with Zopa down around 3.9.

If I knew the asset class would behave like this forever, I'd borrow money and just pile it all into RateSetter .. Daily income, a provision fund, no capital fluctuation .. It's my favourite kind of investment.

It's just impossible to gauge risk against other yielding asset classes, being such a new platform .. I know I wouldn't touch most P2P companies with a bargepole .. Zopa's the one that feels safest – and it did come through 2008/09 – admittedly when the P2P space was much smaller .. I think a 9-10% allocation says: it may be a 'free lunch' at the moment – in terms of low risk and decent yield – but then again we may look back on P2P lending as a disaster that was waiting to happen.
3 users thanked King Lodos for this post.
Jon Snow on 21/03/2017(UTC), john_r on 25/03/2017(UTC), stu winston on 08/12/2017(UTC)
Isabelle Zammit
Posted: 28 November 2017 19:10:13(UTC)
#38

Joined: 28/11/2017(UTC)
Posts: 2

Quite a great discussion, especially seeing that this thread was started 5 years ago but is still relevant to this date. Here's an interesting article tackling privacy concerns and also comparing P2P loans to Personal Loans.
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