BondMason's clients have achieved an average gross return in excess of 8.0% p.a. in 2015, 2016 and 2017 to date. Clients have invested £19.6M across 4,351 underlying loans.1
A review of Investment performance across BondMason
Updated: 28 July 2017
BondMason's clients have achieved a gross return in excess of 8.0% p.a. in 2015*, 2016 and 2017* (*part periods). If you invested £10,000 in October 2015, spread across every loan opportunity, it would be worth £11,470 as at 30 June 2017, a gain of 8.52% p.a.
For transparency, we've emphasised (grey lines) where 6 loans out of 4,351 which led to a write-off of capital and impacted returns. Remember, your capital is at risk when you invest through BondMason or undertake any direct lending activity:
Clients have invested a total of almost £20M since 2015:
In conjunction with our articles on How to target a 8.0%+ p.a. return and Three Tips for Successful Investing - here's an overview of the underlying loans and latest performance data. The analysis is split into three areas:
- Risk: types of loan investments - security, borrower types and platform concentration
- Return: loan rates, defaults and cash drag
- Liquidity: repayment terms and amortisation
The key elements to managing risk are to look for security where possible, and to diversify by security type, borrower and platform.
Typically at least two-thirds to three-quarters of the underlying loans are in "well secured" loans. Some loans demonstrate security better than others - with a direct charge and clear realisable market value for that security. For example, a property-backed loans with a first charge. Other loans may look like they have security, but that shouldn't be accepted at face value. For example, a debenture or floating charge which provides a broad based security against the shares of a company or general pool of assets. The value of the security depends on the strength of the Company's balance sheet and an understanding of other potential creditors before any value can be attributed to the security.
Personal Guarantees are generally not considered as security, but directors may guarantee a certain level of payment if the company cannot make payment on the loan. In reality there can be limitations on the value of these, although are useful to align interests of borrowers and their owners / directors.
We've used the security designations from each underlying platform. However, additional work is undertaken by BondMason to determine whether we actually value that security in each case before allowing Receivables to be sold against the underlying loan through BondMason.
The proportion of underlying loans that relate to Property has increased, and there has been a reduction in the amount of Invoice Discounting loans as a proportion of overall client exposures, reflecting a conservative focus to the approval of underlying loans. We tend to source property bridging finance as opposed to the riskier property development finance.
We don't currently allow Receivables to be sold through our platform where the underlying loan is a Consumer loan; although we may consider doing this in 2017/18 where good security is provided.
Selecting and approving lending partners, and then diversifying across these platforms is one of the most important aspects to mitigating risk in a direct lending portfolio. The maximum proportion of loans sourced from a single platform is typically less than 10%, with most platforms providing ~3-5% of total underlying loans that are accessed through BondMason.
We've reviewed over 100 lending partners (including peer to peer lending platforms) and have only approved 26 lending partners to date.
BondMason has established relationships outside the peer-to-peer lending industry to seek to source the best available loan investments for clients. In February 2017 we sourced more loans from outside P2P lending platforms than from P2P platforms for the first time.
Please note: The grey area of the chart shows the proportion of loan sourced from non-P2P lending platforms.
Underlying loans typically have a rate to the borrower in the range of 6.0% to 12.0% and aim to have a loss in the event of default ratio of less than 2.0%.
Underlying loans are approved across the BondMason platform on the basis of a rate that is commensurate with its risk. Just because the rate is low, it doesn't mean the risk is low. It requires an objective assessment of the opportunity in each case. Also, you can't turn bad credit into good credit by charging a higher interest rate. At some point the borrower simply shouldn't be offered the loan finance. We source attractive risk-adjusted loans taking into account all the key aspects of a particular loan opportunity. Our overall approach tends to be at the more conservative end of smaller loan investing.
Loan rates steadily declined through 2016, a feature commonly seen across the P2P lending industry. As our proposition of loans from outside P2P lending continued to increase, we have ben able to source loans at better rates for clients, leading to an increase in the average rate back up to ~8.5%.
Clients experienced their first write-offs in late 2016 / early 2017, which was disappointing, but unavoidable in lending. The total write-off rate is just 0.1%, with a further 0.2% currently in default. All of these defaults relate to invoice discounting loans.
Overall, we expect a loss ratio of 0.5% to 2.0% p.a. across the portfolio. This is typically higher for invoice discounting finance and lower for property finance.
It is worth noting that we are currently in a benign credit environment, and just because default rates are low it doesn't mean the credit is performing well and the loans are well priced. It is important to stay vigilant in lending as your capital is at risk.
Cash drag is the impact of un-invested cash on the overall returns for a client. This is most prevalent during the initial deployment period, but can also occur if clients aren't fully invested at later times. Over the course of clients' first 12 months with BondMason the impact of cash drag should be less than 0.1%-0.2% on overall returns. Thereafter the impact should be negligible.
The chart shows the average time for a deposit to be fully invested. It has taken an average of 30.2 days for a client to be fully invested on BondMason, although this timing can vary.
In the first half of 2016 the deployment period shortened as we brought on more lending partners. The deployment period then increased in September 2016 and October 2016 as we saw a significant increase in new clients and deposits, and we started to enter a slower period for new loans over Christmas. In 2017 the average deployment period has been reasonably consistent around 25-32 days.
Once fully allocated, clients should typically stay between 95-100% allocated at all times. Although this can drop to 90% allocated from time to time in exceptional circumstances.
The term of a loan and whether it repays over time (amortising) or all at the end of the term (bullet) are key considerations when making a loan investment. Repayment loans should have reduced risk over time, assuming that repayments are being made in full and on time.
Term and Client Liquidity
The average remaining term of the underlying loans is typically kept around 12 months. Since August 2016 this has been below 12 months and is currently below 9 months. This enables us to provide good liquidity to clients if they want it, and also enables our client to create a portfolio of loans which can be re-priced relatively quickly, for example in the event of a rise in inflation.
We aim for clients to be able to sell their positions promptly in the event they would like to exit some or all of their holdings. In most cases clients have been able to fully liquidate within 24-48 hours, although liquidity isn't guaranteed.
We hope that sharing the statistics relating to the underlying loans is helpful for transparency and to enable prospective clients to understand the nature of risks associated with lending. We are happy to discuss our approach and the performance clients can target. Please email the team or call if you have any questions: firstname.lastname@example.org
Loan rates - trends
Defaults and losses were negligible in the period to January 2017.
As at May 2016, although the chart implies 4% was unsecured, we feel the true exposure is closer to 25%-30% of loans being unsecured (due to the nature of the uncertain recovery of the underlying security), which is in line with our investment philosophy.
As at May 2016 loans were well spread across the lending categories.
The average interest rate of loans on the platform as at May 2016 was 8.70% p.a.
As at May 2016, we made over 650 loan investments: only 2 have gone into default - 1 has had full recovery (i.e. zero loss) and the other is still in recovery with less than £500 still outstanding. The loss in the event of default ratio was 0.03%, as opposed to the expected range of 0.5% to 2.0%.
We met our liquidity target in May 2016 exactly.
Warning: nothing in this article should be construed as advice, past performance is not a guarantee of future success and your capital is at risk