The UK Peer-to-Peer Lending (P2P) market is maturing with a number of new investment instruments on the market offering different methods of investing in P2P. BondMason is one of the first P2P asset managers to enter the market. They actively select P2P investments, building portfolios and allowing retail investors to ‘effortlessly earn 7.0% p.a’. Asset Management seems a logical progression for the P2P market, so here is a deeper look into the BondMason investment offering.
BondMason is offering retail and institutional investors access to the P2P market through a managed portfolio.
BondMason’s targeted return of 7% appears appealing, particularly since they are outperforming their targets with a past performance of 8.6%, since April 2015. It is however, early days for the BondMason portfolio so this out performance may be a flattering statistic. Assuming that loans are more likely to default later in their term, we may expect a decrease in returns as loans approach their completion date. Only once the BondMason portfolio has endured a number of loan cycles over a period of time will we have a good understanding of BondMason’s performance. Generally, BondMason favours asset-backed P2P investments, however they do invest across a mixture of borrower types, including: consumer, business and property.
Simply put, after depositing funds into a BondMason account the investor must entrust the BondMason management team to invest their funds across a number of P2P investment opportunities. The diagram below provides an overview of how BondMason operate:
It is important to note that the underlying assets are the same whether investing directly through a P2P platform or through BondMason. It is the loan selection process which differs.
Due Diligence: If conducting investment due diligence is daunting, investors would be advised to employ professionals. Stephen Findlay, CEO of Bond Mason, commented that they undertake a strict due diligence process. ‘We approve 1 out of 3 platforms and 1 out of 3 loan opportunities within the P2P platform. Investor funds are diversified across a minimum of 50 loans.’
7% Targeted Returns: BondMason targets a reasonable 7% net return. This is net of a 1% annual fee and a 0-2% bad debt estimate. The Liberum AltFi Returns Index, designed to measure the returns generated from Marketplace Lending is currently reporting a trailing annual return of 6.55%. Therefore, BondMason are targeting outperforming the market by 0.35%.
Double Diversification: Investors in P2P are commonly recommended to diversify across a number of loans within a platform, however, it is less commonly highlighted that investing across a number of peer-to-peer lending platforms also adds to diversification. By investing through BondMason investors are able to diversify their funds across a number of P2P platforms and across a number of loans within the P2P platforms. This is called double diversification.
Reduced Cash Drag: Cash drag is a consideration that is often overlooked when investing in P2P. Cash drag is created when funds sit in an investor’s account earning no interest, waiting to be lent out. This generally happens when there is too much investor capital on a P2P platform for the level of borrowers on the platform. This is a common occurrence on platforms such as Zopa, particularly around the end of the tax year when more investors come onto the platform wanting to invest. BondMason reduces the effects of cash drag by investing their own capital in loans prior to these loans being made available on the BondMason platform.
In addition to the common risks associated with investing in P2P there are a couple of additional risks associated with investing through BondMason that should be considered.
When referring to the peer-to-peer lending industry as a whole, Cormac Leech, a P2P analyst at Liberum Investment Bank recently stated:
There is an argument to say that there is two layers of fraud risk when investing through BondMason. In addition to investors having to trust that the P2P platforms are operating truthfully, they also have to trust BondMason. BondMason are appointed representatives of ESynergy’s regulatory permissions given some level of comfort to investors that they are governed by FCA regulations, albeit indirectly.
The principal risk when investing in BondMason is that Stephen Findlay and his team make bad investment decisions. For investors it is therefore important that they have faith in BondMason’s ability to select quality loans. This leads to questions around the composition of the BondMason team. On the BondMason website it states that Stephen Findlay and his seven-person team have over 50 years' combined investing experience. Taking a further look into the CV of Stephen, he has an impressive career as both an entrepreneur and Wealth Manager, notably holding key positions at Fidelity.
Possibly not a risk, but more of an annoyance, is that investors are unable to see the underlying loans or P2P platforms which BondMason invests in prior to depositing the min deposit of £1000. For some investors it would be comforting to see the logos of some of the top platforms which BondMason are dealing with before depositing the £1000. It is unknown if BondMason invests in large, established P2P players or smaller, less tested platforms. Smaller or newly established P2P platforms often offer higher gross rates but don’t have established credit models, compared to the large market players. It would be useful to have knowledge of which P2P platforms BondMason invests in prior to committing funds.
Asset Management is a logical step for the peer-to-peer lending market and the BondMason proposition appears to be a good one. Targeting above market rates whilst offering investor diversification may be a good option for retail investors. Ultimately, the investor will need to trust that the BondMason team can select loans that deliver the promised 7% targeted return.