I've been long a few, I've been short two but right now I'm flat of P2P investment trusts. Taking at look at their charts, however, they do look rather ill. Clearly the back-up in US bond yields will be taking its toll on their valuations (higher bond yields => higher discount rates on the loan cashflows => lower NAV).
Clearly Victory Park's VSL is the most ill. Terrible income levels, NAV keep getting marked down. Heavy fees for chronically poor performance. I was short for a bit but when they started buying their shares back in the low 80s I thought it would put a floor in. Wrong because it's trading down at 75.5 this week. P2P Global is not much better trading at just 801.5. Same poor NAV and income generation and they are also buying back shares to floor the price. Even Funding Circle's FCIF is getting hit back down. FCIF has dropped from 106 back to 97 in less than a month. Only Ranger Direct is holding up at 1150 and that is mainly due to the fact it's USD assets were currency unhedged. It's really just a currency play.
Has anyone got any insight into how VSL and P2P are going to turn themselves around? Woodford or not, it looks like the institutional bid just isn't there for them.
I've looked at some of these and have been tempted when they're trading at a big discount but there's always something nagging at the back of my mind.
I'm very uncomfortable with those trusts where you don't know exactly what they're invested in. I was looking at P2P but the details are very vague. I contacted them about it and they said they wouldn't give an analysis. That just doesn't work for me - I need to know how much they have in what platforms. What kind of loans they are (secured/unsecured), what risk band on each platform. Otherwise it's just a bit of a back hole.
Other things that are a worry for me are a) the duration risk. If rates keep going up then these funds will get a MTM hit (discounts will widen if they don't mark the NAV down). I don't get that when investing in the platforms directly....i'm very confident pretty much everything I'm in I can exit quickly (for example I can sell at par on FC) - while the funds are pretty much buy and hold. b) the gearing. Again if rates go up they could run into problems (and they always have refinance risk which could be a disaster in a recession). c) equity holdings in platforms - I'm not sure how these should be valued and I think a lot of platforms won't be viable propositions in the long run so there could be mark downs. d) Management fees. Why pay an extra 1% (+) on top of the platform fees. It's a double hit. I don't get this investing directly (although of course it's less hassle). e) FX risk. With the GBP so weak I don't want to get into foreign assets (not fixed income ones anyway). GBP/USD could quickly move 10-15% higher and that would wipe out 2 years of income.
Having said that, If FCIF managed to get to a decent double digit discount I'd be tempted to buy a little (but I don't think it will). The other trusts are trading on big discounts for a valid reason I feel.
I see the current price reflecting a reaction to the 'C' share issues leading to a saturated market.
Discounts of 20 to 25% are not sustainable long term and will lead to either substantial buybacks and cancellation, reversing some of the over issuance of shares in secondary offers, or corporate action leading to a winding up and return of capital.
I see little further downside, an income return of 7 - 8% and a possible 10% uplift in the longer term. I have holdings in p2p Global and Victory Park having cashed out of FC.
Post by valueinvestor123 on Nov 13, 2016 21:16:45 GMT
I would say (completely personal opinion), that at this discount, the P2P Global is a better bet than most direct P2P investments. FCIF however seems to trade at a small premium if I am not mistaken? GLIF is another one I bought recently and trades at a discount.
I've been thinking about this today. Haven't reached a conclusion. Here is where I am up to:
Management target 6-8% dividend yield, with at least 85% earnings paid out, and this can be held in a tax-efficient wrapper.
2016H1 saw 22.7p return per share, and paid out 22.5p dividends.
Dividends paid out during 2016 (includes November’s coming 11p) amount to a 6.0% yield – but this is at today’s depressed share price. Therefore management have underperformed.
Immediate reasons to think this underperformance could improve:
Funds only now becoming fully deployed which should increase returns (source: monthly newsletters). Held as cash as of:
o Dec 15: 19% o Jun 16: 20% o Sep 16: 5%
Forward-looking yield could now be ~ 6%*(95/80) = 7.1%
Will soon be 100% leveraged (currently 75%). This adds 1/7th again in funds invested. Presuming half of the incremental revenue is taken by the financing cost, this nudges the forward looking yield to ~7.1% * (7.5/7) = 7.6%
It will be sometime until the typical sites we use for P2P are covered by the Innovative Finance ISA • In the meantime the tax shield nudges the forward-looking yield to an effective ~7.6%/0.8 = 9.5% pre-tax equivalent.
I broadly see the geographical diversification as positive.
57% of assets are US consumer, 20% EU and Australasian consumer. Just 5% is real estate. (source: September’s newsletter). My P2P is predominantly UK-property focused.
From a US-based investor’s perspective the fund’s GBP pricing is interesting re the undervaluation of sterling (source: big mac index)
From a UK-based perspective the US consumer exposure is hedged (source: annual report)
Hedging had a negative cash impact of ~£50m following Brexit (source: annual report), a swing in exchange rates that is unlikely to happen again over the coming 1 to 2 years. I don’t fully understand if that money is now irrevocably gone, or could come back to the company should GBP strengthen against USD. I think the latter
Costs that keep the returns depressed relative to our own P2P investments are:
Debt is mostly at Libor + margin; presumably new loans they invest in have interest rates that would evolve upwards should the overall interest rate environment increase. However US rates and Libor may not move in tandem. Debt interest payments are running at about 10% of income (£2.9m on £35m, source: 2016H1 report)
Management charges near hedge-fund levels of fees at 1% of AUM + 15% of NAV increase, but it’s unclear just how much alpha they add (with the volume of funds they have to deploy, are they basically just buying a bit of everything?).
Is it likely that the discount to NAV will narrow?:
YES: Many investors may see it today as a stock with a P/E ratio in the mid-20s, based on current price and 2015 earnings. 2016 H1 earnings were £19.5m. Assuming H2 just mirrors that, then £40m of earnings will give a P/E of 17. This looks particularly cheap in a UK stock market with an average PE in the 40s (Is this true, seems high? source: www.starcapital.de/research/stockmarketvaluation )
STAY SAME: Discount on VPC is -27% (~£300m mkt cap) means P2P’s discount isn’t unusual. RDL’s discount is now only -10% (~£150m mkt cap) but improvement there driven in recent months by unhedged USD exposure since Brexit FCIF is at par, but is too closely connected to a single platform and market to be a comparable.
GET WORSE: A US recession in 2017 would worsen the discount. I’m inclined against that though due to Make America Great Again, 2017 stimulus spending, etc. I am inclined to mark their 3.5% assets that are invested in platform equity down to 0 though.
If my calculations are reasonable, then P2PGI yield is similar to my own P2P at this entry point, and would give me a far greater diversification. This presumes management's performance doesn't deteriorate.
I may make a capital gain or loss on the share price over the lifetime of holding it. I'm not clear what probability to put on each outcome. I want to investigate VPC further. I would feel more comfortable holding FCIF at a 25% discount.
Last Edit: Nov 19, 2016 18:56:50 GMT by marc77: formatting bullet points
Following a conversation with a friend who's much more financially astute than me I've decided against P2PGI at this point.
It's a difficult environment [for me] to find good companies with a high RoE and ability to reinvest earnings that are reasonably priced, so I don't want to be too weighted to stock markets. So it currently makes sense to tilt towards p2p, but at some point I would want to move back to equities.
Individual investments on the platforms can likely be exited within a percentage point or two of par if choosing to switch to equities. The fund route could be a double digit percentage down on the entry price when an opportunity comes to switch. It's not worth the risk of that for the possible current ~10% capital gain (say), the catalyst for which is unclear.
Indeed, there is the asymmetry in upside v downside possibilities also which is inherent for all p2p. They're not going to launch a new product that cures cancer, but more fees may be applied, defaults might rise, even more mistakes with hedging may be made.
Their fees really are ridiculous, especially the 0.5% (kindly reduced from 1%) for their good work in gearing the fund and the 15% of gains which are just happening naturally really with the passage of time - would be much better if they got a percentage of the excess from outperforming a P2P global fund benchmark and nothing otherwise.
On the hedging that I wasn't sure about, the direct quotes from my friend on that are:
They messed up on FX hedging, they aren't super clear, but it seems like they lost money on Brexit, so they were just looking to reduce exposure if the dollar fell relative to sterling, given the reverse occurred and they managed to lose money (rather than create a gain had they done nothing) we can conclude they aren't exactly great and aren't actually managing risk effectively. Of course, Brexit was an extreme event and is unlikely to recur, though it seems like if Brexit FX moves reverse, they will fail to benefit due to their "hedge".
I may be wrong on the exact nature of their hedge. But just feel a banker showed up and randomly sold them something and bought them a big dinner, and then they found the hedge wasnt well designed (I e. Was not a hedge)
If the discount widens another 20% or so I'd look again. Their 5% return would be more like 10% buying at that price.
I have recently taken a small position in RDL and P2P GI.
RDL seem to be performing well, although non hedged USD exposure has helped. In general I prefer RDL over P2P due to their exposure to secure lending side of things but its not possible to tell what exactly are they holding. Might consider adding to RDL position if I get a better price.
Not a fan of P2P GI though (poor performance, opaque nature of the fund, badly designed FX hedges, mostly just unsecured consumer exposure, holding equity in other platforms etc) but 20%+ discount has tempted me as I wanted some exposure to US P2P market which I am not able to access otherwise. And the ability to hold these through tax free account helps, so hoping that further downside is limited at least on NAV discount front.
I've been monitoring P2PGI and FCIF fairly closely recently and purchased a small long position in the former last week. As of today, P2PGI is trading at a 17% discount to NAV and FCIF around par. The P2P IT sector has been hit hard recently by negative investor sentiment stemming from:
Higher than expected default rates raising concerns over underwriting standards (Lending Club / Proposer / FC US etc)
Governance concerns eg Lending Club scandal
Falling origination - origination volumes on US platforms have stagnated in recent quarters after phenomenal growth previously
Expectation that US bond yields have reached an inflection point and will likely rise - the 20 year bond run is over
I'm intrinsically an contrarian investor and I think that markets have over reacted to the above and that there is now value in some of these trusts. My main focus so far has been on P2PGI and FCIF as I have the greatest understanding of their structures and underlying exposures. Of these, my preference has been P2PGI as its more levered and has the greater upside potential given its current discount (albeit probably higher risk). I view the main pros and cons of P2PGI are:
Reasonable discount to NAV of 16% provides a degree of cushion although the discount could blow out much further. My gut feel is that a discount of circa 10% is a more natural level although this not based on any real substance
Active NAV discount management with buy backs puts a bit of a floor to the price
Significant success in securitising some of its debt, with part of its Zopa portfolio placed as notes to institutional investors with the most senior notes rated Aa3 by Moody's funded at Libor +145bpts - hopefully first of many which provides access to cheap leverage
The charts looks terrible even although 760p looks like a floor at the moment
Likelihood of increasing bond yields, particularly US debt which is likely to propagate negative investor sentiment in all things debt
Investment in P2P platforms which form a small but not immaterial part of NAV - I ascribe little value to this
It's policy to hedge its USD exposures which is creating a bit of a cash drag as they need to maintain some liquidity to meet margin calls (I'm certain that USD is going to strengthen and GBP will remain a basket case in the medium term).
I'm probably going to wait to see if 760 is a floor before buying more and may look to short US treasuries and cable as part of the position. The only only reason I'm looking to make this investment is to deploy significant cash lying around in my and my wife's ISA accounts awaiting the launch of IFISAs by some of the established platforms. The cash is burning a hole in my pocket!!!