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Post by robinshould on Mar 24, 2015 17:23:00 GMT
In trying to construct an investment portfolio I quess we are all trying to get the right level of diversification and balancing risk and reward. Kev has said in a recent post that the current rates on RS are higher than they need to be for the risk being run. There have been matches yesterday at 7% which makes a real rate of return of 6.7% ( cpi is at 0.3%). This is the highest real rate of return by some margin on RS since it started in 2010, when arguably the risks were higher for early investors. It is also interesting to look at real rates of return for equities. The data for the S&P 500 is readily available and shows a real rate of return over the last 60 years of 7%, including some early golden years. The volatility to get that return was very high. see link: I therefore tend to agree with Kev. I think the issue for RS is that there is a difference in the minds of investors between what the actual risk is and what the perceived level of risk is, and it will take some time for trust to build. Since the RS return is some 3% above what you can get in an FSCS protected account I guess we can add that margin to what is in the provision fund when looking at what level of default can be tolerated before we are behind an FSCS account. www.simplestockinvesting.com/SP500-historical-real-total-returns.htm
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Post by westonkevRS on Mar 24, 2015 18:30:25 GMT
In trying to construct an investment portfolio I quess we are all trying to get the right level of diversification and balancing risk and reward. Kev has said in a recent post that the current rates on RS are higher than they need to be for the risk being run. There have been matches yesterday at 7% which makes a real rate of return of 6.7% ( cpi is at 0.3%). This is the highest real rate of return by some margin on RS since it started in 2010, when arguably the risks were higher for early investors. It is also interesting to look at real rates of return for equities. The data for the S&P 500 is readily available and shows a real rate of return over the last 60 years of 7%, including some early golden years. The volatility to get that return was very high. see link: I therefore tend to agree with Kev. I think the issue for RS is that there is a difference in the minds of investors between what the actual risk is and what the perceived level of risk is, and it will take some time for trust to build. Since the RS return is some 3% above what you can get in an FSCS protected account I guess we can add that margin to what is in the provision fund when looking at what level of default can be tolerated before we are behind an FSCS account. www.simplestockinvesting.com/SP500-historical-real-total-returns.htm Can't say I disagree with any of the above, fair and analytical assessment of the return. Two points: 1) Yes the current higher rates do attract higher risk customers, unfortunately. However these are still "priced" accordingly, and this only affects recent cohorts. The Provision Fund has benefited from years of surpluses that stay in the fund to protect current and future lenders. 2) I hate to say it, but the markets are not perfect. RateSetter has been better at attracting borrowers than lenders in the last year, so although the number of lenders has grown not at the pace of lenders. Growth in lenders is slower and less elastic, borrowers can grow quickly with a new partner. So both of the above are increasing the lender returns, whilst not being a fair reflection of the risk. Basically a very good deal that over time should revert to a norm. @ westonkevRS
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Post by pepperpot on Mar 24, 2015 18:31:04 GMT
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Post by robinshould on Mar 24, 2015 19:45:05 GMT
Thanks for the response, well articulated. Notwithstanding your observations on p2p returns versus other investments I presume you have some money in RS? If so, what is your logic for so doing? thanks
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Post by westonkevRS on Mar 25, 2015 6:26:54 GMT
On a personal level, I would also prefer to not be protected by the Provision Fund and take the upside at the risk of defaults exceeding the additional income. But then I'm a little old P2P style school and perhaps over confident thinking I have more insight (classic investing mistake). But the RateSetter business model is to be "boring" with easy, quick, safe and predictable fair returns. This isn't going to change in the short term, perhaps it will one day to investors the regulators might call "experienced investors" but this is fraught with difficulties. @ westonkevRS
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Post by p2plender on Mar 25, 2015 7:02:53 GMT
feel free to dish out the pf as a special dividend kev ;-)
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Post by robinshould on Mar 25, 2015 16:00:26 GMT
Thanks for the response, well articulated. Notwithstanding your observations on p2p returns versus other investments I presume you have some money in RS? If so, what is your logic for so doing? thanks I have to say I have a much larger exposure to secured P2B loans. Given that I view P2P as a fixed income product, lending to SMEs aligns more clearly with its "competition" in my portfolio which is HY corporate bonds. However, RS is one of my P2P investments since I do want some P2C exposure and I rate RS very highly in that space. Their business model seems to be really moving into gear. For example the collaboration with the start-up CommuterClub is effectively white-labelling their loan engine. This is a very small tie-in but similar to how LendingClub has started to disrupt the US consumer loan market and very much the tip of the iceberg. At current yields, RS is also becoming much more competitive vs. some P2B platforms and their loans. If RS offered a non-provision fund variant of their product then I'd probably have a much larger allocation to them but that simply isn't their business model. While I don't like provision funds, volumes prove I'm in the minority and RS knows that. Thanks for sharing your thoughts on this. I have had a look at the P2B platforms and I have come to the conclusion there is too much due diligence required to lend out money optimally, and more to the point I don't think I have the expertise ( or want to spend ages to acquire it) to do it. Kev made a point that the classic investor mistake is overconfidence, and I have learnt the hard way that this is true. I think my alternative to RS is an M&G bond fund, rather than selecting my own HY corporates. I agree with you that RS seems the best in the P2C space. For instance I can't see the point in putting money into ZOPA when 1.5% more is available on RS, as I have no data to say the risk is any different. ( yes there is an argument for diversification, but that is surely away from P2P altogether.) I am therefore in favour of the RS approach, including the provision fund, as I don't think I could beat you at credit risk assessment!
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teddy
Posts: 214
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Post by teddy on Mar 25, 2015 16:01:21 GMT
On a personal level, I would also prefer to not be protected by the Provision Fund and take the upside at the risk of defaults exceeding the additional income. But then I'm a little old P2P style school and perhaps over confident thinking I have more insight (classic investing mistake). But the RateSetter business model is to be "boring" with easy, quick, safe and predictable fair returns. This isn't going to change in the short term, perhaps it will one day to investors the regulators might call "experienced investors" but this is fraught with difficulties. @ westonkevRSI certainly wouldn't have put money in to RS without the Provision Fund being in place, and I suspect I speak for a lot of lenders. Without the PF, the rates of return would have to be much higher. Surely this would impact on the number of borrowers? Having had a large sum in Icesave when Landsbanki went bust, I much prefer RS's boring and safe returns, especially when my overall interest rate at RS isn't that far away from what Icesave was giving me.
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Post by GSV3MIaC on Mar 25, 2015 16:53:40 GMT
The rates the borrowers see already include paying for the PF, so they'd pay no more without it, the extra would just come directly, to you instead of getting pooled. The PF was good when losses were not tax deductible, and for people who like a lower risk life, but like life assurance 'with profits'type funds, there is no guarantee that what is being held back 'in case' is justified, realistic, or attributed to the right owners.
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Post by westonkevRS on Mar 25, 2015 18:58:59 GMT
... as I don't think I could beat you at credit risk assessment! I'm sure you can toss a coin as well as any of our underwriters... ?
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Post by westonkevRS on Mar 25, 2015 19:15:25 GMT
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Post by robinshould on Mar 25, 2015 20:18:30 GMT
I thought this link was well worth a read. On the subject of p2p risk I thought the observations on lack of usefulness of p2p risk scoring based on volatility was spot on. The FE score of 1 for RS is of no value at all to lenders as it does not bring in the possibility of default in adverse conditions. I've pasted the paragraph below. But there is a further problem with regard to P2P. The absence of an active secondary market and therefore loan pricing should not be interpreted as a representation of low volatility and therefore a measure of low risk. We were horrified to see last year that an investment website had assigned a risk score to one platform’s loans based solely on the lack of price volatility that it displayed. The ludicrous result gave the platform a risk score of 1. For context, the same site conferred a “risk score” of 10 upon UK Government bonds and the FTSE received a score of 100. This is hazardously misleading and, to our mind, unhelpful. The reality is that the absence of an actively traded market is in itself a risk factor.
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Post by zzr600 on Mar 29, 2015 12:21:40 GMT
P2P has not exactly shot the lights out in comparative return terms vs. most other asset classes in the period 2010+. Gilts have returned over 8%/annum over the past 5 years (18% in last 12m), inv. grade corp bonds 11%/annum, HY corp bonds 17%/annum, S&P 15%/annum etc. Quite true, until it blows up a la 2008, and then suddenly your 100% paper profit turns into a 50% paper loss overnight.....
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duck
Member of DD Central
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Post by duck on Mar 30, 2015 6:36:55 GMT
Not wishing to divert this thread but the effect of the PF has been of direct interest to me over the past week.
My partner is risk adverse when it come to her investments so she has never been interested in P2P / P2B preferring to stick with next to no interest but 'protected'.
Recent Tax planning with my accountants required a decent amount of my capital be moved to her. I have a decent sum in RS (6 figures) so that seemed an ideal place to start moving cash from. In explaining the RS system the PF was a major help in convincing her that she had to open an account with RS and start investing her new found wealth! Without the PF I suspect I would not have succeeded.
So whilst personally I am more than happy to invest with other platforms without PF's I suspect I am in a small minority of the 'ordinary' population and it is people exactly like my partner who RS need to attract as lenders.
Don't concern yourself westonkevRS out of one account into another, plus a little extra
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Post by reeknralf on Mar 30, 2015 7:28:38 GMT
What is the disadvantage to making the provision fund optional, such that an investor can either opt in or opt out?
Is it simply that some investors will opt out, tempted by the higher return, and then whine when some of their loans default, thereby generating bad press for the platform?
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