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Mapping out the Funds Universe: Part 2




By Sam Hodges on 30th November 2015


It’s been a busy week for funds investing in peer to peer lending. Funding Circle have succeeded in launching their first investment trust, raising £150 million for a fund that invests solely in their loans, with a target yield that will probably be around 6.5%. This is an impressive achievement especially when you compare it to the other big bit of news in this space which was that investment manager Ranger has decided to pull their imminent C issue of shares – the target was to raise £135m.

 

Our guess is that we’ll now see an extended pause for fund raising. The chart below from investment trust analysts at Numis shows the sheer weight of money raised over the last year – we’d wager that we’ll see no new issuance for at least another six months.

 

 

The table below, also from Numis, shows the seven funds now vying for attention in the P2P lending space – as you can see from the target dividend yield column the range is between 6 and 10% with an asset weighted average somewhere between 7 and 7.5%. 

 

 

Market Cap £m

Prem/ (Disc) %

Launch Date

Target Dividend

 

 

 

 

 

Funding Circle SME Income

150

n/a*

Nov-15

6-7%

GLI Alternative Finance

54

2.1

Sep-15

8%

P2P Global Investment

464

(1.3)

May-14

6-8%

P2P Global Investment C

397

0.0

Jul-15

6-8%

Ranger Direct Lending

140

5.5

May-15

10%

VPC Specialty Lending

193

(2.3)

Mar-15

8%

VPC Speciality Lending C

169

(6.0)

Oct-15

8%

 

How does this 7 to 7.5% average yield compare with other alternative investments funds – and with the P2P platforms the funds invest in?

 

The big table below gives average yields for a very wide range of funds including those that invest in equities (equity income funds), as well as other alternative credit structures including infrastructure, and asset backed loans. I’ve also included the yield for the iShares ETF that invests in a broad range of UK sterling corporate bonds – the yield on this is currently running 3.43% and is a good indicator of likely returns from investing in corporate bond funds. On the theme of bonds an investment trust called the TwentyFour Monthly Income fund is also separately included – with a yield of over 6%. This is a fascinating compare and contrast as this highly regarded fund invests in asset backed securities and especially mortgage related securities i.e riskier, more complex credits that are not entirely dissimilar to direct loans.

 

You’ll also see at the bottom of the table yields from investing in 3 year products provided by Ratesetter and Zopa, plus the average return for investing in Funding Circle’s loans. Lastly we’ve also included the best composite measure of returns from investing in p2p loans – the LARI index run by AltFi Data which looks at trailing 12 month returns from investing in loans on Zopa, Ratesetter and Funding Circle. 
 

P2P funds compared to other investment alternatives

 

Fund sector /platform

% pa yield

Direct lending

6.5 – 8

Average Equity Income investment trust

4.9

UK Equity income

3.5

Infrastructure funds

5.1

REIT

3.8

iShares Corporate Bond ETF

3.43

Twenty Four Monthly Income

6.8

Asset backed and secured loans funds

4.5

Asset leasing

7

Ratesetter (3 year)

4.8

Zopa

3.8

Funding Circle

7.1

LARI – composite 12 months trailing returns

5.95

 

Obviously when comparing yields in this very simplistic fashion, we need to make some very important observations.

  • Bonds on average will probably be less risky than loans because they’re issued by major institutions with a solid credit rating. That means they will inevitably yield less.
  • Equities will also inevitably yield less but that’s because you also have the potential for capital gains. Direct lending or p2p lending funds are shares, and trade like equities but they aren’t investing in equities (although there are some small equity stakes within these funds). You are highly unlikely to make very large capital gains from investing in p2p lending funds whereas invest in the right equities and you could easily make 5 to 10% a year in bullish markets
  • Investing directly in platforms such Zopa and Ratesetter does come with some protections – both have their own funds that should protect your capital if defaults do start to rise. This back stopping is not available in the listed funds.
  • REITs in particular are an interesting contrast. These invest in commercial property which gives these funds significant asset backing – underlying P2P loans by contrast rarely come with the same level of explicit asset backing.

Given all these important observations/caveats, what to make of the range of returns from alternative funds?

 

In aggregate it appears that you are receiving a roughly 4% premium in yield terms for investing in loan funds compared to bonds (relatively lower risk) and equities (higher risk). When compared to investing in individual p2p lending platforms that premium shrinks considerably to just a few per cent – and bear in mind that with both Zopa and Ratesetter you still got those protection funds. As we observed in last week’s article private investors need to weigh up whether a direct investment in a platform is the better bet versus a fund. With a platform you get easy access to your money, no exposure to the stock market, the possibility of some protection for your funds and no transaction costs – for funds you get a diversified set of underlying investments, proper managers looking after risk, and global diversification.

 

We’d make one last observation. We’re inclined to think that direct lending and P2P loan funds don’t compare terrifically well with alternative credit vehicles such as funds that invest in asset backed securities, secured loans and asset leasing. This latter mix of structures tend to return between 4.5 and 7% per annum and contain within them loans to much bigger organisations, usually with some form of explicit asset backing. This broad alternative credit spectrum – they are nearly always loans to a corporate in one shape or another – look to offer a decent yield. The downside is that these alt credit funds are more complex and invest in structures that sometimes confuse a rocket scientist but the yield is a decent return for the opacity. 

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