AltFi Investor - Risk Column

Should You Invest in P2P via Investment Vehicles?  

Ever since some unnamed person invented the cliché “don’t put all your eggs in one basket” – at which point in time it wasn’t a cliché of course :-D - investors have known that diversification Is A Good Thing from a risk perspective.

However we haven’t yet got a cliché around how much it’s worth paying to spread your eggs around.

P2P is a very broad church.

At one end – probably best for those experienced investors with time on their hands – you can buy individual assets which you choose yourself.

At the other end you can give your money to a P2P platform and they will diversify it for you.

So you might think “job done”.

However although you have, as it were, got eggs from many chickens, they are all from one farm as is the basket. 

Any big problems with that farm and it might infect many chickens or even break your basket.

It’s at this point that institutional investment vehicles come in.

P2PGI is one of the best known vehicles that is easy to invest in (they listed on the London Stock Exchange in 2014) and are currently looking at listing a further tranche of shares [http://www.altfi.com/article/1063_p2pgi_planning_further_equity_issue]. Two other such LSE floated vehicles are Victory Park Capital’s Speciality Lending Investments and the Ranger Direct Lending Fund.

There is clearly high demand for such vehicles which diversify across assets and across platforms (and geographies) thereby ensuring maximum diversification.  Clearly in a nascent industry this is A Good Thing.  Especially as it’s easy to buy shares in them and they take all the hassle away of managing your cashflows, reinvestment, tracking platforms’ investment opportunities.

All of that is great if you don’t want to be an active investor yourself.

So they are definitely adding value.

So the only question that remains is “is it worth it?” – how much value do they add and how much do they charge for doing so?

After all to diversify assets and platforms you could just put a grand in a few leading platforms and tick the “auto-re-invest box” – that’s not too hard to do is it?

Are you risking paying more for the added-value than the added-value is worth?

Do you want the simple, honest answer?

I don’t know. I can’t tell.

And there is the problem.  Maybe the information is out there but if so I can’t find it.  And having run a global investment management business and been a global head of risk at a merchant/investment bank I would be able to tell you if the information was out there.

Let’s step away from all this “alternative” business.

Firstly you are investing in (effectively/actually – the difference doesn’t matter) an investment trust.  One which is currently trading at a premium to NAV (ie you are paying more than the assets are worth).  This in itself encourages more folks to list/raise funds which will over time lead to a reduction of any premia to NAV.

Basically if we see through the wrapper you are in effect giving your money to a fund manager. Simples.

So how do you judge a fund manager?

In the first instance against an index – do they, after costs, outperform or underperform the index?

In the second instance (which few institutions do well let alone individual investors) do they outperform on a risk-adjusted basis?

So what is the index?

There isn’t one.

If we look at the April Newsletter for P2PGI [http://www.p2pgi.com/Home/NewsLetterApril2015] (the latest one available on their website) we can see plenty of very oldskool information about NAV and share performance but nothing which tells us whether the manager is outperforming.

Furthermore the spread of investments is global and includes equity as well as loan assets (which definitely rules out an index such as LARI – The Liberum AltFi Returns Index [http://www.altfi.com/data/indices/returns]).

I also gave up trying to find the true (ie full) costs – “wrapper + fund management charges”.

So is there a benefit to checking out and using these vehicles?

Absolutely.

Is it possible to measure how well they give you exposure to an asset class.

Nope.

Now if you “want a punt” on “something that might go up” then they are probably a good thing as shares go – they may well be a safe bet compared to the average LSE share.

I end up being reminded less of the modern Fintech Age and more of the old Fund Management Age (say ‘80s and before). 

No comparison with indices, tough to find out fees, returns focused on absolute returns, investments in qualitatively different instruments.

Mind you their annual report does have a section on gender diversity – so something has changed since the ‘80s.