Which is more risky? P2P vs Debt investment trust

george4064

Ratesetter (RS) vs Henderson Diversified Income Trust PLC (HDIV)?

Some assumptions are made/things to note:

- HDIV have 143 holdings, so lets assuming there are 143 seperate investments with Ratesetter. (My understanding is that RS do not automatically diversify your money on loan.

- HDIV are holding bonds from reputable companies such as Credit Suisse and Nationwide Building Society, whereas many loans through platforms such as RS use borrowers who do not have much of a track record.

- HDIV can have capital fluctuations, but these are not very volatile.

- HDIV uses gearing.



P.S. I do know there are lots of things to consider, but I wanted to initiate the conversation first to get peoples' thoughts and views.

bigadaj

Not really comparable options.

I have p2p investments but not in Ratesetter, took their kind bonus but the lack of transparency and relatively poor returns for risk don't appeal.

One intermediate option between your quoted options is wise alpha, and something I'll be looking at in more detail.

bowlhead99

I agree with bigadaj they are not really comparable products.

I might trust Henderson to select from the marketwide opportunities and deploy my capital in line with their strategy, buying and selling the internationally diversified investments as they see fit. Whereas Ratesetter is just a bag of private UK loans with a perceived credit score which drives the return they'll plan to give you.

The ratesetter loans are to UK borrowers and will typically be held to maturity so once you've bought them, market changes in interest rates and other international market/economic factors don't significantly affect what you'll practically expect to get back (other than increasing the default risk if market interest rates go up while employment and wages etc do not)...

...while the investments owned by HDIV all have a market price updated multiple times a day, driven by the financial strength/ creditworthiness of each issuer and other macro market factors; the manager may dispose of individual holdings well before maturity realising gains or losses which can dwarf the interest rate coupon. And when you are looking to buy or sell your holding of HDIV you will have to do that at a discount or premium to the market value of the underlying assets, based on market forces.

- HDIV can have capital fluctuations, but these are not very volatile.

That's the problem with looking at short term performance charts.

If you look over the last five years the total return seems to be going up in a nice general trend.

But if you look over the last three years you see that from Dec 2014 to March 2016, the total return with dividends reinvested was 0%. But then from that point to today (roughly the second half of the three year time period) the total return was +20%.

If you look from end of March 2008 to end of March 2009 the total return with dividends reinvested was -50%

So, for a given year-to-eighteen-months period, what are you going to get? 0% ? +20% ? -50%? With those potential outcomes to pick out of a hat, "not very volatile" is laughable. You are just seeing that the bond market has been on a nice upwards bull market for a while.

- HDIV uses gearing

Yes, and that leverage means that the gains or losses made by the fund on their underlying investments are amplified to you as an investor because they are buying assets not just with with the money that equity owners put in, but also with the money they have borrowed.

The borrowing still needs to be paid back even if the losses on their investments are substantial, which could leave relatively little on the table for you the investor, but does not have to be paid back at 50% more than it was borrowed at if the portfolio delivers 50%, so the returns left over for equity owners will be amplified if all goes well.

P.S. I do know there are lots of things to consider, but I wanted to initiate the conversation first to get peoples' thoughts and views.

The basic point is that they are wildly different opportunities - not an apples to apples comparison of one vs the other, as the features and risks are quite different.

ColdIron

george4064 wrote: »

- HDIV uses gearing.

If you are concerned about the level of gearing, maybe have a look at City Merchants High Yield (CMHY), it has a credit facility but is not currently using it