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Post by shanghaiscouse on Nov 13, 2019 13:13:34 GMT
OK I am going through this process now and thought others might be interested. After putting all of my loans up for sale, I was left with a residual portfolio of around 9% of the total I put up for sale. I thought this represented the bad debts I had incurred and which showed under the Summary page under the Net Earnings box as 'defaults'. In fact they are two different things. The defaults are items that have been written off already in your portfolio. If you click on the "My Portfolio" page it says " You are currently lending to X businesses (Y loan parts) totalling £Z. This represents live and late loans that didn't sell, which could also potentially go bad, but so far have not been written off.
Of My Live and Late (total 30k), roughly 6k is Live and 24k late. Why didn't the Lives sell? I guess because they were late at the time the sale went through but then they paid a day or so late? So they recovered their Live status? Anyway I might put them up for sale again post 2/12 just to avoid more bad debts.
I guess the Live/Late split will be dynamic as probably a lot of loans miss payments by a day or two.
However a lot of Lates also go bad. Going through my Lates, it seems most will go bad. So the "annualised return", which is already an absolute con trick, represents a maximum number once you have sold the loans.
Why do I say it is a con trick? Because it does not reflect the current rate of return. I have been negative for all of 2019. It give me a positive annualised return because it uses the high returns I used to earn 4-5 years ago on small balances of £5k increasing to £20k and locks them in, then when it calculates the most recent returns it does not "weight" the average. It just says OK 8% in 2016, 10% in 2017, 9% in 2018 and -1% in 2019 voila (8+10+9-1)/4=6.5% although the balances these % returns are based on are totally different.
In my case I earned 55k of interest but already 32k of bad debts and 2k recovered so far less 5.5k fees to FC. I have another potential bad debt (the Lates and Lives) of 30k, which looking at it I guess at least 20k will go bad. So I will end up with total return over 5 years of ZERO, but this number will never appear anywhere!
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tjtl
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Post by tjtl on Nov 13, 2019 17:05:36 GMT
Well said SS
The numbers produced from FC have as much connection with reality as Party-Political manifesto spending pledges.
In my case, even using SS’s methodology, I still get a negative return- which matches my “cash in, take away cash out, take away value remaining” – not the 3% FC think I have earned.
By the time I have cleared my remaining holding, continued to pay FC their fee for permission to be locked in, and taken the pain on losses I am forecasting a loss ratio of around 5% over two years- not awful, not life threatening, but disappointing and , as said, I am not out yet. I will be out as far as I can in December.
FC will survive for a while yet, the “sophisticated” investors at the time of the IPO have seen to that (and if I feel bruised as a lender they have every reason to be apoplectic as investors). It will survive, but I doubt very much whether it will prosper.
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Post by shanghaiscouse on Nov 13, 2019 18:30:14 GMT
Of course, net earnings would go to zero, but the annualised return wouldn't because it locks in historical earnings made in earlier years.
And in any case, the main problem with the 'annualised return' figure is that it gives an entirely false picture of actual current returns. I have been making a loss for the last eleven months, but it still shows a positive 3.6% return. What bank is allowed to show you some historical interest rate rather than the current rates it offers?
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blender
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Post by blender on Nov 13, 2019 19:05:04 GMT
Of course, net earnings would go to zero, but the annualised return wouldn't because it locks in historical earnings made in earlier years. And in any case, the main problem with the 'annualised return' figure is that it gives an entirely false picture of actual current returns. I have been making a loss for the last eleven months, but it still shows a positive 3.6% return. What bank is allowed to show you some historical interest rate rather than the current rates it offers? Are you sure that the annualised earnings does not go to zero if the all time earnings goes to zero? Both of these are calculated over the whole life of the account. They do a daily calculation based on cash flows and express the result adjusted for a 365 day period. They do not have a concept of previous years which can be 'locked in'. Mine is still at 10.8%, starting in 2012, a little down from the peak, but that is because I withdrew a great deal of capital and earnings after the time they removed self-selection. If, for example, you could withdraw all your investment when the annualised return was at 10%, then you would expect the figure to stay at 10%, not to drift down after a year of leaving. Of course I agree it is a big con, because there is no way that I am currently earning 10.8% on my lates, and Risk Band Removed and recoveries. Nor can anyone earn that in future. A figure over the last 365 days would be a good addition. Edit : crossed with Deees. I agree with Deees.
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Post by shanghaiscouse on Nov 13, 2019 20:48:23 GMT
Of course, net earnings would go to zero, but the annualised return wouldn't because it locks in historical earnings made in earlier years. And in any case, the main problem with the 'annualised return' figure is that it gives an entirely false picture of actual current returns. I have been making a loss for the last eleven months, but it still shows a positive 3.6% return. What bank is allowed to show you some historical interest rate rather than the current rates it offers? Are you sure that the annualised earnings does not go to zero if the all time earnings goes to zero? Both of these are calculated over the whole life of the account. They do a daily calculation based on cash flows and express the result adjusted for a 365 day period. They do not have a concept of previous years which can be 'locked in'. Mine is still at 10.8%, starting in 2012, a little down from the peak, but that is because I withdrew a great deal of capital and earnings after the time they removed self-selection. If, for example, you could withdraw all your investment when the annualised return was at 10%, then you would expect the figure to stay at 10%, not to drift down after a year of leaving. Of course I agree it is a big con, because there is no way that I am currently earning 10.8% on my lates, and Risk Band Removed and recoveries. Nor can anyone earn that in future. A figure over the last 365 days would be a good addition. Edit : crossed with Deees. I agree with Deees.
Its not about my feelings, its about FC being the only financial institution I deal with that does not present the current rates it offers, but instead a historical calculation that bears no relation to what I am actually seeing happening in my accounts. Obviously this historical mish mash 'annualised earnings' is a diversion , a shiny object, to prevent you from understanding the actual return you are currently receiving. If you were going to choose one figure to present to investors to allow them to understand what was happening in their account now, is this the one you would choose? Its like my bank telling me I am receiving an interest rate that is the weighted average of all rates since I opened the account 20 years ago.
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Post by Ace on Nov 13, 2019 20:54:33 GMT
Sadly, I can confirm that FC's annualised return figure will indeed go to zero when ones net return hits zero. I have an account that currently has a net return of ~£6. FC is showing an annualised return of 0.3%. My XIRR calculation gives 0.29%. I've seen the figure slowly fall from a high of around 12% as the defaults rolled in. Ok, it's not actually hit zero yet, but it's blatantly obvious that it will correctly report zero once it does. FC are a totally incompetent shower, but I've found their Annualised Return figure to be a true and accurate representation of my accounts. This, along with blindingly fast ISA transfer out times, are some of its very few good points. shanghaiscouse , if your net return falls to zero once your remaining loans default, as you predict, you will then have ~£50k of bad debt. From that point your XIRR can only increase as recovery payments slowly arrive over time, and you have no more good loans from which you could lose any more cash. Like me, you may well end up with a lower return than you could have made in an FSCS protected account, but your return will be positive. |
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Post by Ace on Nov 13, 2019 21:02:31 GMT
Are you sure that the annualised earnings does not go to zero if the all time earnings goes to zero? Both of these are calculated over the whole life of the account. They do a daily calculation based on cash flows and express the result adjusted for a 365 day period. They do not have a concept of previous years which can be 'locked in'. Mine is still at 10.8%, starting in 2012, a little down from the peak, but that is because I withdrew a great deal of capital and earnings after the time they removed self-selection. If, for example, you could withdraw all your investment when the annualised return was at 10%, then you would expect the figure to stay at 10%, not to drift down after a year of leaving. Of course I agree it is a big con, because there is no way that I am currently earning 10.8% on my lates, and Risk Band Removed and recoveries. Nor can anyone earn that in future. A figure over the last 365 days would be a good addition. Edit : crossed with Deees. I agree with Deees.
Its not about my feelings, its about FC being the only financial institution I deal with that does not present the current rates it offers, but instead a historical calculation that bears no relation to what I am actually seeing happening in my accounts. Obviously this historical mish mash 'annualised earnings' is a diversion , a shiny object, to prevent you from understanding the actual return you are currently receiving. If you were going to choose one figure to present to investors to allow them to understand what was happening in their account now, is this the one you would choose? Its like my bank telling me I am receiving an interest rate that is the weighted average of all rates since I opened the account 20 years ago. I never thought I would be defending FC, but... The Annualised Return figure is not a forecast of the future, and it's not purported to be so. It is a true and accurate description of your past returns to this date. Their Projected Return ranges are their forecast of what you might receive in the future. These have been vastly overstated for me up to now, and I have zero confidence that they will be any more accurate in future.
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blender
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Post by blender on Nov 13, 2019 23:03:10 GMT
Yes, we know what the annualised return is and that Shanghaiscouse's representation of it was imperfect, and we know that FC does offer a projected return based on current lending. Where I agree with Shanghaiscouse (I think) is that FC does not tell you how your investment is currently doing, in a way that would allow you to compare your actual current returns, say over the last year, with the options available from elsewhere. I opened a 'test' ISA in spring 2018 and its actual performance after a year, as presented by the annualised return, was far less than either the projected return when it was opened or the lower projected return when it was mostly sold. They will say that the projected return will not be made in a year - because it does not include the projected future recoveries, but frankly if I invest £20k for a year and cannot take out £20k at the end of the year, then that is not good. Far better with an Assetz term account where you know what return you will get and you can take it out with the interest giving the proper notice (in normal market conditions). The 90 day rate is still 5.75% and that is what you get (though rates can change and targets may not be achieved). I can see why FC is scared of telling you your return for the last 365 days. The fact that my annualised return on the old classic FC account still shows 10.8% is both totally accurate and totally misrepresents the health of my current lending.
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Post by Ace on Nov 13, 2019 23:34:59 GMT
Yes, we know what the annualised return is and that Shanghaiscouse's representation of it was imperfect and we know that FC does offer a projected return based on current lending. Where I agree with Shanghaiscouse (I think) is that FC does not tell you how your investment is currently doing, in a way that would allow you to compare your actual current returns, say over the last year, with the options available from elsewhere. I opened a 'test' ISA in spring 2018 and its actual performance after a year, as presented by the annualised return, was far less than either the projected return when it was opened or the lower projected return when it was mostly sold. They will say that the projected return will not be made in a year - because it does not include the projected future recoveries, but frankly if I invest £20k for a year and cannot take out £20k at the end of the year, then that is not good. Far better with an Assetz term account where you know what return you will get and you can take it out with the interest giving the proper notice (in normal market conditions). The 90 day rate is still 5.75% and that is what you get (though rates can change and targets may not be achieved). I can see why FC is scared of telling you your return for the last 365 days. The fact that my annualised return on the old classic FC account still shows 10.8% is both totally accurate and totally misrepresents the health of my current lending. I totally agree with everything you said blender . But, to be fair to FC, their AR figure does not claim to represent the health of your current lending. I understand why some might misunderstand this figure, and I think that it would be very helpful if they displayed a Current XIRR figure (showing your XIRR over the past year for example). However, they won't do this as it would highlight that people's returns are tanking, and would likely lead to the majority of the remaining lenders selling up. Perhaps it would be best if the FCA insisted on such a figure being displayed on all platforms. It would certainly get my support. Up until the beginning of this year the normal market conditions at FC would have also given a similar, almost instant, access to funds that you described for AC. I'm not knocking AC here. I believe their DD and loan recovery is now vastly superior to that of FC, though I'm not sure that was always the case. Given a simple choice between the two, I would certainly prefer AC. My returns there are far superior to any I've achieved with FC, and they generally have far superior security.
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benaj
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Post by benaj on Nov 13, 2019 23:54:39 GMT
Here's an update of my "ZERO" balance account:
- No active loan
- Monthly recovery payment around £1
- 0 account balance after transferring out recovery money to bank account
- XIRR 5.11% after 22 months
- Annualised return on the dashboard 5.3%
- 10 bad debts : 200 loans (repaid / sold)
- Recovery rate: around 7% of capital a year
If I am lucky, I might receive enough recovery to cover the fees on this FC account, i.e. £34
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Post by Ace on Nov 14, 2019 0:10:20 GMT
I think the last 365 day IRR would be a bit of a bizarre, arbitrary and not necessarily a helpful figure. Lenders seem to have a poor grasp of current full IRR from day 1 to day NOW. I’m not sure they’d really understand last-365 IRR from day NOW minus 365 to day NOW or be guaranteed to draw the correct informed conclusion. The biggest weakness of current full IRR is that the last figure in it - the current portfolio valuation - is based on zero value for defaults and full value for lates and lives. The only bit of that that is 100% reliable is the 100% for lives (well, pre the imminent 1.25% discount to sell). The value of defaults at zero is typically understated and the value of lates at 100% is overstated. But at least in the current full IRR you only have that issue in the terminal value of the portfolio. If the last 365-IRR was introduced you’d have a somewhat arbitrary starting valuation of the portfolio and a somewhat arbitrary valuation at the end. Low and behold some arbitrary 365-return figure would pop out. In the hands of anyone who doesn’t do IRR figure for fun it’d be at least a bit dangerous! And anyone who does IRR figures for fun would probably just laugh and ignore it! The current full IRR isn’t perfect but it’s probably the least bad IRR figure if you’re giving just one number. There are plenty of areas to criticise FC but their portfolio reporting is just about OK. You make a fair point, which I accept to a degree. However, I think that, as long as the definitions of lates etc are constant, you would get a pretty representative 365 day XIRR. (I may not have given this sufficient thought though). As for how many people would understand the figures, I'm really not sure. It seems that the present one may not be that well understood. You can lead a horse to water... Interesting discussion. Thanks all.
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Post by Ace on Nov 14, 2019 0:19:34 GMT
Here's an update of my "ZERO" balance account: - No active loan - Monthly recovery payment around £1 - 0 account balance after transferring out recovery money to bank account - XIRR 5.11% after 22 months - Annualised return on the dashboard 5.3% - 10 bad debts : 200 loans (repaid / sold) - Recovery rate: around 7% of capital a year If I am lucky, I might receive enough recovery to cover the fees on this FC account, i.e. £34 Thanks benaj , your figures are similar to one of my accounts, though your returns are much better than mine. I've noticed that the AR displayed is often higher than my calculated XIRR. For me it's always been due to the fact that FC don't account for uninvested cash, so the difference represents the cash drag, which they admit to in their definition.
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sl75
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Post by sl75 on Nov 14, 2019 14:27:44 GMT
You make a fair point, which I accept to a degree. However, I think that, as long as the definitions of lates etc are constant, you would get a pretty representative 365 day XIRR. (I may not have given this sufficient thought though). Insufficient thought...
Recovery payments made from the portion of the loan book which is valued at zero at the start of the year would then "unfairly" boost the XIRR figure.
Taking it to the extreme, once the loan book has fully matured so that all remaining loans are defaulted bad debt (as mine has been for some time), any finite XIRR would represent a lower return on an initial value of zero than any recovery payment at all.
The main issue with FC's annualised return figure is that it doesn't take cash drag into account, but as it stands it's useful to compare the 16.9% annualised return from FC with similar performance figures that I can calculate for individual shares or funds (or indeed for the entire account, but that figure DOES take cash drag and account management fees into account) using the spreadsheet that tracks my stocks and shares portfolio. (For current holdings there, these range from about +33.9% to -44.3%, but overall account is currently 8.8%)
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blender
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Post by blender on Nov 14, 2019 14:54:26 GMT
I take the points above and agree that FC does not overclaim for its annualised return and would have difficulty with producing a 356 day return. It was ok when you could choose and manage your own loans and interpret the results. The problem now is that it is a black box where you have no control over the loans but the results are dependent on the loans chosen for you, and results are difficult to predict and explain. I think that when you go to the black box, and aim it at the consumer lender, then you should not give the lender the raw results of the loans chosen for the lender, but should offer fixed results as term accounts as Assetz does. Otherwise you are treating the lenders as unsophisticated in the control of their lending, but sophisticated in needing to understand the predictions and results. I use Assetz for lower fixed rates (subject to, etc ...) and Ablrate for a real hands-on higher rate platform with full control and SM, but with very basic performance reporting - you have full data to analyse yourself. FC now falls between those two stools, imo.
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Post by shanghaiscouse on Nov 14, 2019 15:56:39 GMT
Why would it be difficult to produce a 365 day return? It isn't difficult at all and in fact that is what they do anyway as their current calculation is just the sum of daily returns since you started lending. In my case, I started lending about 5 years ago but at first with small balances of 5k building up over time to around 25k. I was getting 6-8% during those good years before they had decided their target was to lend more than the entire UK banking sector (this is an actual boast of theirs). However, in no way is that comparable to getting -2% on 350k, which is what was happening during the last 11 months, whereas the "annualised" (this is also a poor desciption, it should be called all-time annualised return) it dropped relatively quickly from 6% and now sits at 3.6%. Because there are no provisions made against the "late" portion of the residual portfolio then the annualised return is always overstated. It is possible that recoveries will increase it, but as anything defaulted take an automatic 40% hit (to cover the additional costs of pursuing defaulted loans) then I am not expecting a lot back through that avenue. Basically their calculations are imprudent - prudence demands that the Late part of residual loans has provisions set against it, and nothing is anticipate for recoveries.
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