11% over 3 years from Ablrate P2P

jamesd

Just adding those up and ignoring compounding that's 25.63% over five years. If there's no loss to default this loan would deliver 5.1% of that in three months. And quite possibly the whole 25+ in three months or less using the resale market, though that does depend on supply-demand balance.

With that sort of potential - and it actually being realisable - there's a rather large margin for potential loses before total return falls to the five year ICOV level.

masonic

sparsely wrote: »

I can't post links so you'll have to google it but 11% isn't an unusual return for a global covered bond index. Something like ICOV is available on most platforms and gets you loads of diversification with a low TER.

According to the link posted above, the weighted average coupon is 2.3% and the yield is 1.17%. So presumably, when you buy shares in that ETF you are paying on average a 100% premium on the par value of the underlying assets. It's understandable that this should happen given where global interest rates have ended up. Capital values of fixed income assets will rise as interest rates fall. What do you suppose will happen if interest rates start moving in the other direction?

One of the key benefits of selecting your own fixed interest securities is that you can hold them until maturity and avoid these capital fluctuations. There is no doubt that this bond fund contains lower risk securities than those being discussed here, but the returns from here are likely to be lower than most people could get risk free in a deposit account, so why would anyone bother buying such a fund?

sparsely

Supposing that you are going to be able to realise valuation gains on this extremely illiquid loan better than on a widely traded fund seems optimistic to say the least. And if yields on that fund aren't high enough for you there are others available. There doesn't seem to be any reason for this to offer significantly higher risk adjusted returns than a diversified group of asset backed bonds.

Additionally how many of the people investing in this loan realise that the maturity is actually 3 and 6 years? It's all very well saying that you can sell it on the secondary market but is the liquidity going to be there when you need it?

masonic

sparsely wrote: »

There doesn't seem to be any reason for this to offer significantly higher risk adjusted returns than a diversified group of asset backed bonds.

The main reason is the institutional money that has flooded into the bond markets over the past few years has potentially created a bubble - bonds are certainly very overvalued at the least. With a yield of a little over 1% and the likelihood of the price falling in the short-medium term, investing in that ETF of yours seems crazy when one could stick £20k in a Santander 123 account and in all likelihood get better returns risk free. Fair enough, the loans talked about in this thread aren't suitable for everyone, but I would say that ETF isn't suitable for anyone.

Additionally how many of the people investing in this loan realise that the maturity is actually 3 and 6 years? It's all very well saying that you can sell it on the secondary market but is the liquidity going to be there when you need it?

One would hope anyone who is considering investing in anything would do enough research to understand what they are investing in. As well as knowing about the duration of a loan agreement such as those discussed here, that would also apply to understanding why past performance of certain ETFs is not likely to be a guide to their future performance.

Your point about the secondary market is valid - it is not something people should rely on. I would only invest in loans that I was willing to hold until maturity.

jamesd

sparsely wrote: »

Supposing that you are going to be able to realise valuation gains on this extremely illiquid loan better than on a widely traded fund seems optimistic to say the least.

The aircraft loan has three month term, so just holding to maturity is not exactly bad liquidity. There is good demand for loans with the properties of this one on the resale market, though as always supply-demand balance matters and people who try to sell very soon after it is available in the secondary market won't realise the full potential.

Now, that's based on my experience actually using the Ablrate to both buy and sell on their secondary market and my own above 25% XIRR from using the place. How deep is your own experience in that market?

sparsely wrote: »

And if yields on that fund aren't high enough for you there are others available.

Those returns are lower than the best deal bank current or savings accounts. How about actually providing an example that really does beat the returns, or even match them?

sparsely wrote: »

There doesn't seem to be any reason for this to offer significantly higher risk adjusted returns than a diversified group of asset backed bonds.

One of the benefits of P2P is reduced intermediation. Another is that it's a relatively young market. In the medium to long term I agree with you on this point but not in the short term while the markets are relatively young.

sparsely wrote: »

Additionally how many of the people investing in this loan realise that the maturity is actually 3 and 6 years?

Why do you believe that the maturity is actually 3 and 6 years? For which loans? There are varying maturities for available loans, as mentioned in my post a couple of days ago.

sparsely wrote: »

It's all very well saying that you can sell it on the secondary market but is the liquidity going to be there when you need it?

Depends how much you're trying to sell. One of the people at Ablrate asked a question about liquidity over at the P2P Independent forum. His blog entry P2P Lending - Does the lack of liquidity put you off? reflects the replies received. Here's what the most relevant portion says:

"I informally asked some users on a leading peer lending forum some questions that basically boiled down to “If you had £300,000 invested across 6 peer lending sites of your choice, how much do you think you could withdraw in an emergency within 24 hours by using the secondary market, assuming that you were not really willing to take any notable loss?”.

The answers may surprise you. Most users felt that they would be able to access between 25% and 50% half of that amount within 24 hours assuming that the platforms made the transfer as soon as the funds were available (some people felt that platforms may take a further 24 hours to process the payment). That is still pretty good liquidity though. A few felt they could access more, a few felt that they could access less. My takeaway from it was that most of the people that I questioned would agree that “accessing 30-50% of your invested cash within 72 hours is entirely feasible”."

That's the opinion of people actually using the P2P markets, who know what they deliver in reality.

If you read the discussion areas for the better paying platforms what you'll find is people grumbling about insufficient supply and how fast pieces sell, making it hard for them to buy as much as they want to. That state may not persist but it is the situation now and since the higher paying places have been around.

jamesd

masonic wrote: »

Your point about the secondary market is valid - it is not something people should rely on. I would only invest in loans that I was willing to hold until maturity.

Your point about maturity makes sense as a long stop but reality today and for the likely medium term future is that liquidity is excellent.

Still, lots of supply at one month term (much lower rates, though) or at 12% or so on three to six or twelve month terms, so maturities are quite decent for people who want to target liquidity without relying on secondary market selling.

sparsely

Why do you believe that the maturity is actually 3 and 6 years? For which loans? There are varying maturities for available loans, as mentioned in my post a couple of days ago.

The loan referenced in the title of the thread - it is advertised as 3 years, but if you read the Ablrate terms they can extend it to up to 6. In fact the first post says:

While the loan term is fixed, there is a secondary market that allows buying and selling loans, of course no guarantee that you'd find a buyer if you wanted to sell.

Which is not true. They can repay early if they can find a better rate elsewhere or Ablrate can extend the term by up to three years.

The main reason is the institutional money that has flooded into the bond markets over the past few years has potentially created a bubble - bonds are certainly very overvalued at the least. With a yield of a little over 1% and the likelihood of the price falling in the short-medium term, investing in that ETF of yours seems crazy when one could stick £20k in a Santander 123 account and in all likelihood get better returns risk free. Fair enough, the loans talked about in this thread aren't suitable for everyone, but I would say that ETF isn't suitable for anyone.

I think comparing it to promotional current account features is a bit unfair as they have very different roles. Juggling current accounts is only suitable for non SIPP funds (and normally ISAs) and you have to be prepared to do a lot of legwork. On the otherhand if you do want to put the effort in they offer better risk adjusted returns than anything available (including this).

That's the opinion of people actually using the P2P markets, who know what they deliver in reality.

If you read the discussion areas for the better paying platforms what you'll find is people grumbling about insufficient supply and how fast pieces sell, making it hard for them to buy as much as they want to. That state may not persist but it is the situation now and since the higher paying places have been around.

The liquidity worry isn't that liquidity is bad now, it's that it won't be there when you need it. Suggesting that there will be a 5% spread on this particular bond in two years time does not seem unreasonable to me. The platform has not been around for long and that is a risk factor in itself as we don’t know how successful it will be in the future, and consequently what the liquidity will be like then.


Having said all that this sort of thing does seem quite fun, I just would never have it as part of my long term savings portfolio.

sparsely

Also I just checked their website again and they can "pause" the secondary market on any loan if they feel like it, so I think that overall the liquidity risk on these things is pretty huge.

masonic

sparsely wrote: »

I think comparing it to promotional current account features is a bit unfair as they have very different roles. Juggling current accounts is only suitable for non SIPP funds (and normally ISAs) and you have to be prepared to do a lot of legwork. On the otherhand if you do want to put the effort in they offer better risk adjusted returns than anything available (including this).

I don't think it is unfair to compare an option that is available to the general public because it is not conventionally used for the purpose as it is not available to institutional investors. The role a particular investment plays in a portfolio is in the eye of the beholder. There is no reason at all why cash cannot play the part of bonds when bonds are overpriced and possibly in bubble territory.

Very few people should be holding short duration fixed interest securities in their pensions, and for those who should (i.e. those who will be drawing on the money within 5 years), they'd probably be better using a money market instrument to avoid capital losses associated with interest rate rises. Based on the performance stats of the fund above, it doesn't fall into that category at all and capital fluctuations significantly outweigh the income generated by the underlying assets.

You might not like the Santander 123 account, but it doesn't require a lot of legwork and besides, there are short term fixed rate accounts paying around 2%, which are not "promotional" and still yield more than this ETF you seem to favour. These are also likely to offer better risk adjusted returns than low yielding covered bonds in a rising interest rate environment.

masonic

sparsely wrote: »

Which is not true. They can repay early if they can find a better rate elsewhere or Ablrate can extend the term by up to three years.

Are you implying that lenders would not be given the option of exiting at the end of the original term?