BondMason clients seek attractive rates of return with low expected losses to target 7.0% pa
BondMason clients target a return of 7.0%+ p.a.. How is this possible?
The return to clients comprises of four things:
- Interest payments
- Less: the impact of any loan losses
- Less: cash drag
- Less: fees
Interest: typically 5.0% to 12.5%
Clients can access returns arising from loan and receivables from approved P2P platforms and direct lenders. P2P platforms can operate faster, cheaper and more effectively than many banks and traditional lenders. This enables P2P platforms to be able lend to small and medium sized companies, as well as consumers, at rates which are similar to banks. But because of their reduced costs, P2P platforms can deliver higher returns to lenders through those platforms.
For example: a small company looking to buy some assets, can borrow from a P2P Platform at 9.5% per annum. Because the borrower typically bears all or most of the costs associated with that loan, investors can get a 8.5% p.a. to 9.5% p.a. return from that loan
We've identified and reviewed 75+ P2P platforms in the UK. BondMason conducts detailed due diligence on each platform, and we only approve those P2P Platforms that can demonstrate a good understanding of credit. From approved platforms, each loan is reviewed prior to selection. The team behind BondMason invest our own money into every loan, before making available a corresponding receivable for purchase through BondMason
Impact of any loan losses: typically 0.0% to 2.0% across BondMason
With any P2P Investment your capital is at risk. There are two important steps to help minimise the impact of any loan losses:
- Careful loan selection; with a bias for asset-backed lending
Careful loan selection with a bias for asset-backed lending: focusing on P2P Platforms which facilitate asset-backed loans means that the end borrower is providing security, should they default on loan or interest repayments. For example, security over their house or an asset in the company. So, in the event of default, the lender can sell the asset to recover the value of the loan. The effect of this is to minimise any loss in the event of default. We model this at between 0.0% and 2.0% across the approved P2P Platforms.
Diversification: clients of BondMason are able to get a minimum of 50+ receivables in just a few clicks. So should any underlying loan go bad; then the impact on the overall portfolio should be negligible.
For example: if an underlying loan goes bad and 75% of that loan is recovered, then a BondMason client with exposure to the corresponding receivable, would incur a loss of 0.050% against their total portfolio (or £50 out of £10,000). Which is often more than compensated for by the interest paid on other receivables. However, if that loan was part of a small portfolio, say of 10 loans, then the investor could lose 2.5% (or £250 out of £10,000), which could materially impact overall returns.
Cash drag: modelled at 92% to 98% deployment for BondMason
Cash drag is a new term for many. It refers to the negative impact on your returns from having cash uninvested at any one time. This can be because there aren't sufficient loans available for you, or because a particular platform simply has more investors (lenders) than borrowers.
There are two times that cash drag may affect you when deploying funds across BondMason:
- At the start: when you first add funds to your BondMason account it can take 7-28 days for these to be fully deployed. This will reduce your expected return in the first month.
- When reinvesting: there may be a 1-3 day lag between being fully repaid a loan position, and waiting for it to be deployed again.
We are able to minimise cash drag by ensuring a steady flow of new receivables available for purchase by working with a number of approved P2P and direct lenders. We like to enable clients to have cash fully deployed for 92% to 98% of the time.
Fees: 1.0% p.a.
We charge a flat fee of 1.0% p.a. In most cases investors won't feel the impact of this fee, as BondMason is often able to access the same loans at higher interest rates than standard investors. And loans which are not available to most retail investors
A few P2P Platforms also charge investor fees, but these are typically no more than 1.0%; and are already factored into loan selection decisions
Getting technical: arriving at a target return of 7.0% p.a.
Bringing these elements together, we conducted a detailed Monte Carlo simulation of 1,000 investment portfolios, each with 50 P2P loan investments. A target return of 7.0% p.a. was outperformed in 89.1% of simulated cases.
In 2015 and 2016 the average net return clients acheived through BondMason was 7.51%.