PREFUNDING AMENDMENTS

I've been thinking about this post a lot since I first read it last night, and at the risk of having to increase my "dumb count", would like to explore it a bit more. So Investor , no offence intended, but I hope you don't mind if I question it . Also, please forgive the necessary assumptions....

Let's say we have a Lender L who has funds with Saving Stream. They are going to be in one of three modes:-

1. Actively increasing their investments
2. Holding mode, possibly reinvesting repaid loans / interest income
3. Winding down / selling out for some reason

For the purposes of a "big hitter and diversification" discussion, and assuming a liquid secondary market only 1. is really relevant (because both 2. and 3. naturally tend towards smaller holdings over time, more in the case of 2. and fewer in the case of 3.).  So now let's assume that L seeks to reduce the risk of overexposure to any one loan by having a max (possibly target?) investment of £25k in each loan. Note that this is a "diversify into all" strategy rather than "diversify where possible, pick winners avoid losers" strategy.  With large loans that are likely to be relatively under-subscribed (at least compared with smaller loans), that £25k max is going to be easily achievable. With smaller loans it is necessarily going to be that much more difficult - it's much easier to buy $100m of GE than it is to buy £66.6m of a tiddler on AIM.

But the mere fact that L can buy a piece of that smaller loan does increase L's level of diversification. Perhaps not as much L would like, but surely, it's better than the loan not being brought to market at all?  Is it possible that the risk here is less one of diversification than one related to underwriting? Especially if L invests more than their target amount in large loans in the expectation that they can sell down and reinvest the proceeds in other (perhaps smaller) loans?

Or perhaps to put it another way, I would seek to increase diversification by getting exposure to more loans, as long as they were at or below my target. Whereas, as I understand it (and I could well be wrong!), Investor's approach might be to reduce his target amount subject to the maximum he can get invested in the smallest loan?

Looking at my own Saving Stream portfolio, my largest single position constitutes ~6.5% of my overall holdings. That's a little higher than I would like, but it will naturally trend down as I invest more on the platform, and get other loans up closer to my target level. Were I to have bid, and received, n times my target level for any particular loan the picture would look very different.

I accept that difficulties in diversification may lead to less "big hitter" investment in large loans (and perhaps corresponding problems for the platform, like CBs etc), but I don't see that as a diversification risk, I see it as, effectively, underwriting risk.

To mack 's point, L will always be able to get his or her fill of large loans, and won't bother with smaller ones (because you are right, why would they bother with tiddlers). But as those large loans come on diversification will naturally increase.

Note that I fully accept the importance of "big hitters" to a platform. Equally however I think concerns about funds going elsewhere are perhaps overstated - people, whether "big hitters" or otherwise, are already going to be diversifying across platforms (not to mention other ways to invest / asset classes), and a certain level of competition between those platforms is likely to be beneficial to all. Equally, I'm sure we all move funds between platforms as opportunity ebbs and flows.....

Cheers,


RM (looking nervously at his current dumb count)

It won't matter if you just fund what you want or 10 X what you want, you will get the same as everyone else(excluding the tiddlers)

Mack, were are you seeing the penalty? Do you think that only the big hitters want to diversify? I appreciate that big hitters enable bigger loans but I am not with you when you argue that smaller lenders have to get out of the way in smaller loans so that you have a larger portion. As much as SS need big hitters to carry out big loans, so big hitters need SS to invest their money. They would not be here in the first place if this was not so. They would take money to other platforms as necessary anyway because diversification is not only a matter of how many loans you are in on a single platform, but also a matter of cross platform distribution. I think that you know this well enough.

To conclude, I think the system is simple enough.

Yes but who is taking the £5m loan from deep-pockets? I think there is enough for everyone. What I do not like is being elbowed out. 
Have you every experienced a boy coming to the playground with a ball, saying: "you either play the way I say or I will take the ball away."?
To me, all this discussion sounds like that boy with the ball in the playground.

I agree with Mr Bean above. Small investors (I am by no means a big hitter) may like this 'bottom up' method for small loans but there is the worry that annoying the big boys may be a bite-on-the-bum in the long term. I think that just the one change, limiting pre-fund amount per loan to your current uninvested total plus 10% of invested funds, would solve the current 'problem' without showing favouritism towards any particular investor group.

With the proposed bottom up method, I can see two ways in which the big boys can get their diversification.

1. Balance away from SS.
This has already been discussed with the conclusion that over time this may make the large loans harder to launch.  The big hitters won't just make up their investment shortfall by piling larger sums into a few big loans with SS.

2. Work even harder to diversify on the SM.
So you thought it was tough to pick up any of the smaller loans on the SM. I suspect it will get even more difficult.

Personally I favour some middle ground between the previous proportional system and the new bottom up method, several variants of which have been suggested. I'd be quite happy with the proposed 10% of invested funds plus 100% of uninvested funds. I suspect over time SS will move in this direction.

Whatever the rules are, I'll play the game by the rules.  In the (now seems like distant) past, I bashed away at the keyboard when new loans were launched until I got a connection and then grabbed as much of the loan as I wanted. Then the system changed and encouraged me to overbid so I did. With the new rules I will certainly be even more active on the SM. I certainly don't use bots but I have been accused of it as I can be very quick on the keyboard when I need to be. And if this doesn't satisfy then new money (and probably repaid money) will start to go elsewhere.

But there's another thought here too. I will be disappointed with just a few hundred pounds in some of the smaller loans. And yet there are a lot of people in this world for whom a few hundred pounds is a huge sum of money. They are struggling to survive and certainly have nothing spare to invest in P2P. So whatever the rules are here on SS, I won't complain and I won't forget that there is an enormous amount I have to be grateful for.

That sums it up very nicely.