e share price.
The largest UK fund offering exposure to P2P and marketplace lending has reached a critical juncture with its investment management strategy ‘under review’. But could improvements in its loan book performance and a new discount reduction plan be just around the corner?
On Tuesday the board of the £832m P2P Global Investments fund has released a brief statement revealing only that:
“Following discussions with MW Eaglewood Europe LLP (the "Investment Manager") and significant shareholders of the Company, the Board has resolved to initiate a review of the Company's investment management arrangements.”
This has been followed today by a similarly terse statement by the manager, MW Eaglewood, noting the board’s comment and stating:
“MW Eaglewood announced in its January update that it was dissatisfied with the net returns achieved by the Company and was undertaking a review of additional steps that may be taken to improve results. As a result of this review, MW Eaglewood has recently submitted to the Board for consideration a substantial Performance Enhancement and Discount Reduction Plan as one potential approach.
"The investment manager is committed to working constructively with the Board and shareholders to achieve the best possible result for the Company.”
Given the recent performance of the shares, having closed last week in the low 770’s from an IPO price of 1000p, frustration is understandable. However, the NAV performance has been respectable and suggests it might be simplistic to assume the problem lies solely with the manager.
The NAV of the fund has never posted a negative month. Furthermore, after a slow start immediately post launch the NAV has recently been out-performing a benchmark of UK P2P assets that represent the return an investor would have achieved by investing into these loans directly, as shown in the graph below.
This has been achieved after fees and despite a number of headwinds which appear to be in the process of shifting to become tail winds.
The extent of the frustration may be partly explained by the performance of the major shareholders of the listed trust. P2PGI is backed by a host of well-known fund managers, including equity income stars Neil Woodford and Mark Barnett.
The pair, who collectively own 40 per cent of the trust, worked together for more than a decade at Invesco Perpetual before Woodford left in 2014. The widely trusted manager went on to set up his own firm Woodford Investment Managers and launch the £10bn CF Woodford Equity Income fund while Barnett ascended to be head of UK equities at Invesco Perpetual as well as take on Woodford’s huge portfolio of assets including the £5.6bn ‘Invesco Perpetual Income’ and the £11.1bn ‘Invesco Perpetual High Income’ funds.
While the pair have both substantially outperformed their peer groups over the longer term, their fund’s recent performance struggled partly owing to their style being out of favour as value stocks have rocketed. Over the past year, Barnett’s two open ended funds, and Woodford’s equity income fund are bottom quartile as shown in the graph below, with the funds delivering almost half the return of the FTSE All Share index. One of Barnett’s other fund’s the Invesco Perpetual Income & Growth investment trust has returned even less.
Source: FE Analytics
Whilst at this stage the market can only speculate as to the details of the ‘Performance Enhancement and Discount Reduction Plan’ that the manager has proposed there are other factors which of themselves should ensure an acceleration of performance.
Firstly, there is the boost that will likely be provided as the fund emerges from a period in which it has suffered due to owning a glut of loans aged between 7 and 21 months old. This is the period in which loans begin to default, but before recoveries come in, so optically delivers the worst phase of performance over a loans life cycle, according to Rupert Taylor, founder and CEO of AltFi Data, the company that compiles the UK returns benchmark.
Secondly there will be a benefit to be gained from utilising leverage facilities that had previously been arranged, and paid for, but not deployed into return paying assets, Taylor adds, he believes that P2PGI’s NAV will accelerate in the coming months:
“P2P GI experienced a glut in deployment 1 to 2 years ago in line with their capital raising activities. As a result, they are under-weight the loan vintages that provide a boost to returns – i.e. loans less than 6 months old which do not tend to default, and loans over 30 months old which tend to benefit from recoveries.”
“This has depressed returns. But as the age profile becomes more well distributed, and the existing glut of aged loans fully mature, ceteris paribus NAV performance will accelerate.”
This could prove extremely important. Because ultimately it is likely to be an increase in the understanding of, and confidence in, the ability of the underlying loan assets to sustainably deliver returns that will result in the most durable re-rating. If the board and shareholders can wait long enough, then patience could represent a much better strategy for narrowing the discount than risking the kind of impairment to the underlying assets that could be provoked by a change in manager.
