BondMason's clients have achieved a net return of 7.51% p.a., after all fees, losses and cash drag. Over the last 12 months we've invested in £8.4M across 1,645 loans.1
A review of Investment performance across BondMason
Updated: 4 January 2017
BondMason's clients have achieved a net return of 7.51% p.a., against a target of 7.0% p.a.. In conjunction with our articles on How we target a 7.0%+ p.a. return and What we do - here's an overview of our investment approach and latest performance data. We've split the analysis 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
Our Approach: key elements to managing risk are to look for security where possible, and to diversify by security type, borrower and platform.
We aim to have two-thirds to three-quarters in what we regard as "well secured" loans. Some loans demonstrate security better than others - with a direct charge and clear realisable market value for that security - for example, asset or property-backed loans with a specific charge or first charge. Other loans may look like they have security but that can't be taken 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 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 adopted the security designations from each underlying platform in our chart. However, additional work is undertaken by BondMason to determine whether we actually value that security in each case. Although the chart implies 3% is unsecured (4% as at May 2016), we feel the true exposure is closer to 25%-30% of loans being unsecured, which is still in line with our investment philosophy.
We aim to split loan investments reasonably evenly across Property, Invoice Discounting and Corporate loans. During 2016 we increased our allocation slowly to Property-backed loans but we tightened our criteria following the Brexit vote and forecasts of a softening in the housing market.
Please note that some corporate loans are secured against property - to explain the difference between 63% of 'Secured - Property' in the section above and only 54% of property loans here.
We don't currently invest in Consumer loans, although may consider doing this in 2017 where good security is provided.
We aim to diversify across approved platforms without allocating more than 25% to single platform and ideally keeping platform concentration much lower than this. We've reviewed over 80 peer to peer lending platforms and direct lenders to date, and select those that we feel provide the best risk-return profile for the target return of 7.0% p.a.
As at the end of 2016 we had live investments with almost 20 platforms, with an average concentration during 2016 of 5.9%. During the course of the year we hit the 25% concentration limit with two platforms, and at the year end the maximum allocation was 21.4%.
These figures exclude any cash waiting to be invested and may over-state the level of concentration - which we feel makes the analysis conservative.
Approach: we prefer loans that 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%.
Loan rates - distribution
We look for loans with a rate that is commensurate with its risk. Just because the rate is low, 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 seek to identify good risk-adjusted returns 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.
There is a collection of loan rates around 11-13% - these are typically invoice discounting finance, property development loans and asset-backed lending. Loans with rates higher than 12% are almost entirely invoice discounting loans which are shorter term. The loan rates of 7.0-9.0% are typically property bridge finance at LTVs of 70% or lower, or invoice discount finance after third party platforms fees have been accounted for.
Loan rates - trends
The chart shows average rates after third party fees. The current average of loans on the platform is 8.43% p.a. We have seen a reduction from over 9.0% in May 2016 arising because of two trends:
- A general reduction in rates across peer to peer lending. However, we have kept our discipline in approving loans with an appropriate level of risk and return.
- An increase in weighting towards property loans which generally have rates lower than invoice discount finance and corporate loans.
We tend to do more property bridging finance than the riskier property development finance. Which is why the average for property is close 8%, as opposed to 10-12%+.
We aim to minimise the expected loss ratio. This combines the default ratio, as well as taking into account the loss given default (i.e. the amount of money you would lose if the loan went into default). We do this by having a preference for loans which have some form of security, and with sensible risk-adjusted rates. Overall, we expect a loss ratio of 0.5% to 2.0% p.a. across the portfolio.
We have made over 1,645 loan investments: 19 loans have gone into default (0.76% of loans by value) - 11 have had full recovery (i.e. zero loss), 6 are still in recovery and 2 have had crystallised losses (although in each of these two cases 50% of the overall loan was still recovered). The two crystallised losses totalled £809.66, less than 0.01% of our total investments to date.
Whilst we are disappointed to have had our first losses in the period, if all defaulting loans became full losses, then the loss ratio would be 0.47%, at the lower end of our anticipated range of 0.5% to 2.0%.
Our investment analysis model expected c.40-60 loans to have entered default by now, with a recovery of c.25-50% for each loan. However, it is important to remember that these assumptions are an annual average through an economic cycle and the backdrop in recent years has been benign with low interest rates, reducing unemployment and modest economic growth. Whilst we take steps to mitigate the impact of defaults, the nature of investing in loans means defaults will rise in the event of certain economic shocks or if we enter a period of weaker economic performance.
Cash drag is the impact of un-invested cash on the overall returns for a client. It typically takes 28 days for a client to be fully invested on BondMason, although this timing can vary.
Based on our deployment rates throughout 2016, we've calculated an average cash drag of 10% (this means, on average 10% of cash remained un-invested for the period) for clients holding funds with BondMason for 6 months or more.
We will be including a chart on cash drag in future update reports, and further analysis of how this impacts returns.
Approach: we want to know how we are going to get out of an investment (exit) before we make the investment. 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. A trade-off here is that we would only accept a non-amortising loan (e.g. bullet) if the term is short (3-12 months) and/or there is a good security behind the loan.
We seek to have one-third in less than 3 month loan investments; one-third in 3 to 12 months; and one-third in more than 12 months. This mix seeks to ensure there is a good balance of capital repayments happening at any one time. We have a slightly higher weighting to shorter term loans at present.
We aim to keep the average term remaining around 9 months or less. This helps to protect the portfolio against inflation and pricing movements. The average remaining term of the portfolio is currently 5.6 months. The average remaining term of the portfolio based on the remaining term at the point of first investment by BondMason is 8.2 months.
We aim to provide good liquidity to our clients, by selling their positions in the event they would like to exit some or all of their holdings at any time. We aim to do this with a few days, although liquidity isn't guaranteed.
In 2016, we have been able to fully liquidate clients and return funds within 24 hours in 95% of cases.
In 2016 we invested £8.4M across 1,645 loans.
Investment activity is driven by client demand which increased significantly during the year: the pace of investment is accelerating; we invested as much in the final month of the year as we did during the whole of the first half of 2016.
We typically don't invest more than 50% in a single loan, and often take much less. The overall value of approved loans on the BondMason was £265 million.
We hope that sharing our investment philosophy and statistics is helpful for transparency and to enable prospective clients to understand our investment approach. However, our approach and investment philosophy goes beyond the data - the BondMason investment team apply judgement (as well as data) in their approach, and trends change over time. So statistics should always be treated as an indication only, and with caution. To repeat a famous quote: "There are 3 types of lies: lies, damned lies and statistics" - Benjamin Disraeli
We are always happy to discuss our approach. Please email the team or call if you have any questions: firstname.lastname@example.org
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