By Daniel Lanyon on Wednesday 26 April 2017
The giant fund has had a testing 12 months but its latest numbers bode well for a shift in strategy.
The £833m P2P Global Investments fund saw its net asset value [NAV] rise 0.55 per cent in March, including a 0.16 per cent uplift from its share buybacks, prompting a boost to its latest quarterly returns.
Having launched nearly three years ago, the fund is the largest and best-known portfolio investing in the fast growing alternative lending market. While it has not ever seen a fall in its NAV on a monthly basis, returns have disappointed some and its discount has been pronounced over the past year or so reaching more than 25 per cent. The fund’s strategy, headed by manager MW Eaglewood, is “currently under review” implying some dissatisfaction from its larger shareholders.
Its latest numbers, however, show a boost in returns with total NAV return for Q1 2017 of 1.18 per cent, while its discount has narrowed to 15 per cent.
Following 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 manager believes that some of the headwinds affecting the portfolio in 2016 are receding at the same time the portfolio is “evolving” its strategy and universe of opportunities into the broader alternative credit spectrum including greater balance lending exposure.
“[We] will continue shifting the portfolio to secured loans and asset backed structures which should offer a more attractive yield and downside protection all else being equal,” the firm said in a statement.
“The Investment Manager has also played an important part in the evolution of strategic relationships with certain platforms. At the same time, the Investment Manager has been focusing on larger and more established platforms which have demonstrated strong credit performance.”
“This strategy offers the benefits of large scale and access to term markets, a combination of the Investment Manager expects will result in cheaper cost of funding and thus a higher return for the shareholders.”
In the past year the trust’s manager has been rotating exposure by reducing unsecured consumer lending, particularly in the US, Loans to US consumers represent about 45 per cent of the portfolio, down from 55 per cent of assets at the start of 2017. The firm is also reducing this further with a target to reduce to about a thirf of the portfolio.
This trend reflects a move from more ‘traditional P2P’, with new capital moving into more direct lending in the secured/asset backed market in the UK.
In Q1 2017, the largest partners by new origination volume were 30.9 per cent via Zopa UK (consumer), 25.4 per cent through Zorin a UK property development platform and 16.3 per cent through Funding Circle UK.
Analysts at Numis Securities say this highlights the growing diversification of the trust into different alternative credit niches.
“We have always been wary of P2P GI’s high level of exposure to US consumer loans which tend to be made up of a high level of credit card refinancing (20 per cent of Lending Club’s Q4 2017 origination) and debt consolidation (60 per cent). This portion of the portfolio has the highest rolling impairment rate and appears to have been a drag on performance. As a result, we welcome the move to reduce US consumer exposure.”
“In addition, focusing on the UK will reduce the level of currency hedging required which led to cash drag during the exchange rate volatility of mid-2016. There will also be an increasing allocation to platforms where P2P GI has strategic relationships, which may have some advantages of increased control and visibility on the credit process. However, there are also some potential conflicts of interest in holding equity stakes and lending via platforms, such as becoming the lender of last resort.”