When I received the invite from Bondora to join the new product Go&Grow, my first reaction was: why should I be interested in such a low yield? Personally, I did not see any appeal in it but then I saw, from Bondora reports, that it was having a huge traction among other investors and I wanted to understand why.
The user interface, as expected from Bondora, is really well done: the possibility to choose explicit saving goals is smart, you can visualise how your gains will compound over time and even maintain different portfolios under the same user profile.
The problems start when you look what’s behind the curtain.
I decided to invest in p2p loans because of the high yield and diversification from other asset classes; Go&Grow definitely do not offer any upside on this front. The current shown yield, 6.75%, is also capped on the upside but is not guaranteed, meaning there is a chance you will get even a lower return.
On the other side, not only I do not need daily liquidity, I consider it potentially dangerous.
You should only invest in p2p lending funds that you are ready to lose and do not need. Platforms are too young, there is no control nor regulation, the chance one of this platform defaults tomorrow is real and should never be overlooked. If you think that daily liquidity will give you the possibility to pull your funds before a platform defaults…forget about it, it is not going to happen, especially to you.
To protect you and justify the high risk you are incurring investing in p2p, you should aim at least at a 10% yield. In the current low-to-negative interest rate yield environment, this aspect is unfortunately too often forgot. In UK, Ratesetter offer a 3.3% return while Marcus 1.50%: for less than 200bps of additional return, there are investors giving up the UK’s deposit guarantee scheme; this is insane. I read bloggers that compare Go&Grow to their current account with an established bank and gloat about the yield difference; current account balances are secured in almost all countries, under certain amount that depends on the specific jurisdiction, you will get your money back even if the bank defaults; you do not have that type of protection with Bondora, so your comparison has no basis whatsoever.
10% can be an arbitrary yield but the point I would like to make is that you need a high return to play the game. The only exception I allow myself on this is Funding Circle: FC is listed in UK, therefore their books are public and audited, they have transparency requirements and big institutions, like the European Investment Bank, invest in their loans. Given their social mission, to help small and medium firms, I consider FC too big to fail, i.e. if one day they will be in trouble, I see the UK Government intervenes to find a buyer and keep the platform working.
To get the maximum out of compounding you need time, you need to be invested for years and years: why would you want daily liquidity then? P2p loans already generate monthly cashflows, you can use those to rebalance or re-target your investments; better invest in a platform that either has lot of short term loans (provided the yield is high) or a liquid secondary market. This point is linked to the dividend-paying-stocks obsession I see on lot of blogs about p2p: I would probably need an ad-hoc post on this, in short high dividend stocks are simply a tax inefficient, more expensive way to invest in the value factor…just pick a low cost, value tilted ETF!
What about the dangerous part? Liquidity gives you a sense of security: investors tend then to forget that their funds are invested in illiquid loans. The only way Bondora can cash you out daily is if they can match your redemption request with another user intention to invest or use a cash reserve. The cash reserve by definition yields Bondora 0% (if they are lucky), represent a drag vis-à-vis the 6.75% target they have to offer and therefore have to be quite limited in size. If a lot of investors rush to the door, for example if Bondora is forced to lower the offered return due to underlying loan defaults (wink wink), good luck to see your money on your account as advertised. This is the problem ETFs investing in illiquid assets, i.e. high yield bonds, have as well, but in their case the ETF price can diverge from its NAV, attracts buyers and ultimately provide liquidity…if the seller accept the discount and the loss.
In its blog, Bondora disclose the rating distribution in the loan portfolio; in January 2019, the latest available, 37% of the portfolio was invested in F rated loans, which is the lowest rating on the platform (if we exclude the not rated ones).
Here you can see that rarely the actual return on those loans met the platform target and we can only check the most recent past, where figures tend to be inflated by the nature of the product.
Recently Mintos introduce a product that solves a lot of above issues and more…to be continued.
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