The £860m P2P Global Investments trust delivered net asset value [NAV] total returns of just 0.23 per cent in September, resulting in returns of 3.41 per cent in 2016 and therefore implying a shortfall in its target range.
So far 2016 has been tricky year for the closed-ended fund, the largest portfolio of p2p and marketplace loans available to investors in the UK. Not only have stock markets been volatile for the FTSE 250-listed investment trust but a series of other setbacks have thwarted a return within its 6-8 per cent target.
Over the course of year returns have been hit by the cost involved in putting in place debt facilities that were not fully utilised, US platform Lending Club increasing rates, which reduced the value of existing loans that were marked to market. Also, the fund was hit by the need to hold large cash balances against potential losses from currency hedges, says Charles Cade, head of investment company research at Numis Securities.
“NAV returns of 3.41 per cent year-to-date are disappointing for shareholders, and are well below the run-rate required to hit the dividend target. The fund is targeting a yield of 6-8 per cent on NAV. The last quarterly dividend was 11p - 4.3 per cent annualised on NAV - of which 8.9p was paid from revenue reserves and 2.1p from special reserves,” he said.
The fund offers diversified exposure to a range of p2p and marketplace lending platforms’ loans around the world, with the portfolio currently mostly biased toward consumer loans, particularly in the US although its manager Simon Champ has said this will be reduced in the coming year or so in favour of greater exposure to Europe and SME lending.
It also seeks to apply a near 1x leverage according to Cade, although this is currently at 0.76x. The portfolio has a weighted average coupon of 10.9 per cent.
“The fund was a huge success following its launch in May 2014, growing its net assets from £200m at IPO to £870m via a series of secondary issues. However, there has been indigestion in the peer-to-peer lending sector since mid-2015 and negative sentiment towards has been reflected in a widening of the discount for P2P Global Investments,” Cade adds.
The investment trust is currently trading on a 19.8 per cent discount. Cade says this is “potentially attractive” but he adds he sees “little prospect of it narrowing significantly until the fund starts consistently delivering NAV returns in-line with target returns.”
Nonetheless, Champ has been buying back shares in the trust in a bid to improve the discount during several stages of the year including last week. This has brought the total number of shares held in treasury to 1,223,935 out of the total 86,306,803 in existence. This amounts to nearly 1.5 per cent of the total shares.
Champ says the fund’s credit performance has been “generally satisfactory” during the past quarter and that impairments on the “loan book as well as on a vintage by vintage basis, since inception, remains, on the whole, within original expectations.”
He adds that returns have been impacted by the life cycle of the portfolio, which experiences few delinquencies in the early months, but as it becomes more seasoned the monthly impairment level increases before stabilising at average levels.
Cade said: “The manager (Champ) believes the current weighted average seasoning is around the peak level of monthly delinquencies across the loan book’s life cycle and expects this to “stabilise and potentially improve” as parts of the loan book mature.”
P2P Global Investments was the first, and is still the largest UK-listed fund, to offer exposure to the marketplace and p2p lending space. Alongside other closed-ended portfolios such as VPC Speciality Lending, Ranger Direct Lending, Honey Comb and Funding Circle SME Income Fund, it was launched to take advantage of the growing disintermediation of bank lending by smaller more agile lending platforms launched in the post-financial crisis era.
In September, the fund securitising a pool of UK consumer loans originated via Zopa, which should significantly reduce the cost of debt on these loans to 168bps, compared to warehouse lending rates of 300-400bps, according to Cade.
It has also diversified the portfolio more recently across with holdings in loans from platforms in Ireland, Germany, Canada and Australia.