What does recent market volatility mean for the incoming Innovative Finance ISA?

Headlines in the Business Pages have been dominated since the start of the year by stories of massive volatility across financial markets globally and how billions of pounds have been wiped off the value of pension funds and Stock Markets – mainly attributed to a slowdown in the Chinese economy, a slump in the price of oil and uncertainty around where the next ‘engine of global growth’ is going to come from. The value of sterling has plummeted, too, as the global investment community has reacted to the threat of Brexit.

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Even risk-averse savers who opted for income yield over capital growth have been left disappointed; with interest rates anchored at rock bottom levels, it is not much comfort for the prudent among us to see their reward a measly 0.1-2% per annum in long term cash deposits and Cash ISAs. Whilst peace of mind is important, the public appear to be paying a high price for keeping their cash safe under the UK’s Financial Services Compensation Scheme (FSCS).

So what does all of this mean when investing in peer-to-peer which, unlike other asset classes, has been having a field day for a number of years now and is developing an enviable track record of consistent returns?

Well, according to the latest statistics from NESTA in its ‘Pushing the Boundaries’ report, over 1m people in the UK invested, donated or lent via alternative finance platforms in 2015 and have been experiencing the benefits. Again, according to the NESTA report, the recipients of a large amount of this participation were borrowers sourcing debt from P2P lending (consumer, business, invoice discounting) which ballooned to £2.5billion in 2015.

Alongside the thousands of borrowers who were able quickly and efficiently to raise £2.5 billion through P2P, are the investors who were able to consistently see net returns well in excess of 5% - on some platforms north of 15%. The Liberum Altfi Returns Index is increasingly used as the benchmark to represent UK P2P industry returns. The index is constructed using cash-flow data sourced from the four biggest European platforms who together represent around 70% of the market.  This index shows a net return of 6.19% in the twelve months to 29th February 2016.  These returns are impressive, and the longevity of the series also illustrates how serious an alternative this asset class has become. 

Figure 1 – Liberum AltFi Returns Index

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Accepting that comparisons often need some qualification, it seems that the wildest rides are not to be found in P2P, but in Stock Markets in equities and bonds.

If we take equities as an example the FTSE All Share Index hit around 3,834 almost a year ago in April 2015 but was standing at 3118 in February this year – a fall of roughly 18%.

Equally, if we compare this with bond markets, with all its attractions including liquidity, structure, investment bank sponsorship and disclosure, things aren’t looking much rosier - at the time of writing this article, the Vanguard UK Investment Grade Bond Index is down 0.53% over the year (to March 2016).  If we compare this to one of the closest products coming from the P2P sector, Wellesley’s highly subscribed to Mini Bond (that is eligible for a stocks & shares ISA) is currently returning 7% p.a. (for a five year commitment).

P2P, especially now that it is imminently going to become tax free within the Innovative Finance ISA, is suddenly looking very attractive and the industry needs to push this message. 

However, for all this evidence of consistent positive returns and non-existent volatility (albeit with the risk of bad debts), some commentators and advisers have declared themselves uncomfortable that ordinary people are being tempted to invest in P2P without, they believe, fully understanding all of the risks including the lack of FSCS coverage.  However, I don’t think anyone, dare I say it even Lord Turner, could level a lack of transparency about risk at the P2P industry and the work that continues to be done with regard to provision funds is to be commended.

So for how much longer can P2P investing be ignored by financial intermediaries and managers who are supposedly in the know? It’s fair to say that from April this year there are a number of game-changers that will impact retail investors and we hope will be the ‘wake-up call’ for the Financial Advice and investor communities; the Personal Savings Allowance, Bad Debt Relief and of course the Innovative ISA to name the big ticket items.

Once net returns of, say, 6% on the full allowance of £15,240 are shielded from tax, investors stand to save circa £350 per annum in tax each year – and that’s not including transferring in prior year ISAs. In light of recent market turbulence, that investing in P2P is shielded from, at least directly, it will be increasingly difficult to justify why tax free P2P investing hasn’t been included within investors’ portfolios. Investors may well ask why their financial adviser has not brought this to their attention earlier.

I doubt even the wildest Alternative Finance enthusiast is suggesting that investors should put their entire portfolio into P2P lending. However, in light of recent market turbulence that has affected the value of even supposedly the ‘safest’ of assets, P2P’s position as an uncorrelated and low volatility asset class with consistent and attractive returns, that can now be enjoyed in tax free ISAs as well as tax free SIPPs, can no longer be ignored by either the direct or advised investor.  

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