Marketplace lending: An alternative in volatile public markets (Lending platforms vs stocks)

Picture is worth a 1000 words. Unfortunately for investors, there is not much to say when it comes to the volatility the public markets are having recently.

Including dividend returns the S&P 500 returned 1.19% in 2015. This year, 2016, its even worse. In fact it is the 4th worst month since 1987.

(source: Marketwatch)

And the Dow Jones? Down almost 15% from its recent bull high. Needs to fall 5% more to hit the Bear market. Yeesh.

Contrasting this with the stable returns of, lets say LendingClub Marketplace:

You get a median return of 7.4% in a portfolio of 250 notes.

Source: Lendingclub.com statistics page

Stock market volatility is a reality and no one is endorsing a 100% investment in marketplace lending or real estate lending or business lending. What this highlights is the LOW volatility of this asset class. Volatility destroys wealth, as detailed in prior post.

You can plug and play around with CAGR (compound annual growth rate) of the S&P 500 HERE

As a title II platform, Reamerge, or majority of other residential or commercial real estate platforms do not publish their return statistics online. However, if consumer lending returns are any indication, these platforms offer even more downside protection as they are usually asset backed while have uncorrelated strong returns in their niche markets.

It is certainly a good time to give these platforms a look be it business lending, real estate, consumer lending, mortgage lending. While there are no guarantees, a well diversified marketplace lending portfolio should provide good cash flow and low volatility.

You can read more extensive discussion of the stability of returns with analysis HERE in our previous post.

 

 

 

The home of the brave?

Frank Rotman, one of the partners at QED venture capital firm, has released an excellent paper on small business lending. He has surmised that atleast 100 alternative lenders exist in the USA.

Reamerge is proud to be among them. We are also one of the very few platforms (may be only one?) which is completely retail investor driven.

HERE is the paper. It is an excellent read.

Is it worth investing in P2P Lending (loans) : Volatility revisited – part 2

Previously  we did a short statistical analysis of LendingClub loan investments that have matured and how they rated against a bond ETF. However, risk mitigation / control is one of the cornerstones of smart investing. Professional investors in P2P Lending space SHOULD be “boxing” risk instead of boxing investment products (student loans, consumer credit, business loans). In short, the Reamerge team are students of risk allocation  rather than the asset allocation theory.

Today we will look at recent market volatility and how incorporation of P2P lending/Marketplace lending into a traditional investment portfolio significantly reduces one’s portfolio volatility. It should be noted that while niche platforms in real estate crowdfunding may correlate with housing markets, a unique platform like Reamerge that is the fusion of high quality business lending with collateral is further insulated from stock market crashes. They are also separate from consumer credit platforms such as LendingClub which is dependent on credit cycle and correlated to the larger economy. The purpose of using LendingClub as proxy for marketplace lending industry  is their open data that can be readily analyzed and their market leader position. Most of the private crowdfunding platforms are private placement portals and deal details are prohibited under law (hopefully in the future this will change as SEC passes sweeping crowdfunding laws – at least we hope so!)

Market Volatility:

As we saw, Dow slid 1000 points last week and blue chip stocks such as GE dipping >20% for example. The CBOE volatility index, or VIX, is also known as the “fear index” jumped to its highest level since 2011. While pundits are correct in preaching to long term investors to not be worried, shouldn’t investors demand higher returns for all the volatility they have to stomach? 

S&P 500 is negative year to date. Is this going to recover? No one knows how this year is going to play out. What remains factual is that currently there is market volatility that investors have to bear.

LendingClub returns: 

Source: Peercube

The chart above is yearly Net Annualized Returns with loss rate at Lending Club. More niche platforms such as Real estate crowdfunding platforms and Reamerge with secured debt has similar stable return profile with a strong downside protection (first position liens etc). How can this help level the retail investor portfolio volatility from the equities market is discussed below.

P2P/MarketPlace Lending Can help:

As industry’s first, LendingRobot has done an excellent analysis of including marketplace lending in one’s portfolio to smooth out the volatility. A quick highlight with screenshot from their PDF is below

Beginning with a traditional portfolio of well diversified ETF stocks and bonds below

The average returns during 2005-2014 is 7% with volatility of ~40%

LendingRobot ran multivariate regression and their internal loan default rate predictions on LendingClub data to come up with the following head to head figures

What is striking about the figures is the super low volatility of Marketplace Lending.

Finally, how much allocation should there be in market place lending? They came up with a fancy chart

With a minimum volatility of 0.9% you’d get an expected return of 4.87% – not bad. Alternatively a 7% return with a low volatility of 1.9% can be had with a 12% marketplace lending allocation (vs the traditional volatility of 40%!) These figures are likely even better if you have some allocation to niche platforms.

Full report can be seen HERE

Conclusion: 

• Recent market turbulations, while not affecting long term investor, does raise questions: in the background of an overall negative market returns this year, global negative bond returns, can one consistently expect 7-8% returns while accepting the market volatility (risk premium)?
• Marketplace lending smooths out the volatility in the equities as an uncorrelated asset class while having a higher return than bonds.
• Niche platforms such as Real Estate, Business Lending (Reamerge) offer further diversification and thus further reducing volatility in one’s portfolio while realizing handsome uncorrelated returns.

Is it worth investing in P2P Lending (loans) : A short statistical analysis – part 1

Previously we had a major post on different asset classes and where P2P lending fits in a well diversified portfolio. Today, we would do a statistical analysis of annualized returns of loans in P2P lending, specifically, those that are available on major platforms specializing in consumer debt financing namely Lending Club and Prosper.

Of the two major consumer debt marketplaces in the USA, Lending Club (LC) has received the majority of media attention sans successful IPO in December 2014. Due to the exposure, more so than ever, retail investors are looking at LC as a viable alternative to generate stable returns. Let us take a deeper look.

BOND RETURNS:

Let us evaluate BND (Vanguard Total Bond Market ETF) returns which we will take as a good estimation of the bond market in general. Since 5/2007 till 12/22/2014 BND payed a total dividend of $22.07 (see monthly returns graph below)

Vanguard Bond ETF Yields

In these 2763 days, the Bond price it self has appreciated $8.91 (it increased from $73.84 to $82.75)

The Annual return is: (82.75 + 22.07)/(73.84)]^(365/2763)  – 1   = 0.047 or 4.7%

 

Calculating MarketPlace (P2P Lending) returns: Internal Rate of Return (IRR)

Previously we discussed how returns on lending platforms are amortized. An exact calculation of returns can be complicated. It is not as simple as the quoted annualized return stated on many deals for the individual investor. As Reamerge is a peer lending platform, investors should be aware of the calculations.

ROI

The simplest of calculations is Return on Investment or ROI. Mathematically its

ROI = (α – β ) / α

where α stands for an arbitrary ending balance and β is the initial invested balance.

It would work something like this – you invested $3,000 and a year later that grew to $3,300. Based on formula above your return was 10%

Investing in P2P Real Estate Platforms/REAMERGE – a historical overview and comparison with other asset classes

Introduction:

How do you determine if investing in REAMERGE is a “good investment”? In simple terms, it comes down to value. An asset’s value depends mostly on risk and underlying cash flows it produces. With that definition, the best way to assess an asset’s value would be to find a comparable asset with similar risk profile to determine yield/ROI. One can also flip the script and look at it from the other side: compare similarly priced assets and determine the risk associated with the asset. Before delving into a proper comparison of an investment on REAMERGE, let us look deeper into two important topics: diversification and historical returns of popular assets – stocks, bonds and real estate.

Diversification:

At a basic level, diversification helps with risk mitigation, specifically idiosyncratic risk (i.e. Risk that is specific to an asset or a small group of assets). This is more than just investing in different stocks – which hopefully you are investing via ETFs – for example, real estate may be doing well when stocks are not in a bear market.

Institutions such as Harvard have performed very well when it comes to diversification of their portfolios. These institutions go beyond assets such as stocks and bonds.

Now they invest in P2P lending platforms as well. Always ahead of the curve there Harvard…

Modern concept of crowd funding (in equities) and crowd lending (REAMERGE, Lending Club, Prosper etc.) are changing the field of non-traditional investments by democratizing the opportunities. If properly included in the portfolio, investors can achieve higher risk adjusted returns than traditional stocks and bond portfolio while lowering volatility.

Why is that?, because private equity and private lending has traditionally had no correlation with the broader capital market on a local level. What an investor invests in REAMERGE are loans given to cash flowing businesses with real estate. Such private deals are now finally available to retail investors.

Enough talk, let’s jump to facts