Immediate Access to your cash and the Hidden Features of QAA

The answer to your question was eminently sensible and what I would expect.  The fund will be invested in a portfolio of reasonably safe and liquid assets that probably includes deposits, gilts, and good quality short term bonds.  There's little point in insurance on a sensibly constructed portfolio, and it just adds cost.

I'm going to weigh in here and suggest that from knowing nothing about these things (investment accounts etc) valueinvestor123 suddenly has a remarkable amount of knowledge on provision funds and other P2P products.  What trouble followed up with was very balanced.  It does seem there is an underlying agenda, as such I am using my right to reply (and yes it is biased towards AC which I make no apologies for).

QAA
To keep this simple, QAA is the mechanism that invests your funds automatically across a wide range of loans on the AC platform.  What QAA does is provide a more efficient market place to get out of the loans that you could otherwise be holding for up to 5 years (or possibly longer).  It is designed for people who may not have the time nor the inclination to read detailed credit reports and supporting information that is provided on every loan.  If you do want to do that, MLIA is better for you.  As long as the market is buoyant, you have an easy exit route with very little hassle.  As with every loan on AC you have the security that supports that loan to help repay the loan if it goes bad.  If there is a short fall there is also the provision fund to support any capital loss.  To date, no lender in our investment accounts has suffered a capital loss.

Security
The security is valued going into a loan that gives a level of coverage to fully repay the balance.  However, asset values fluctuate for multiple reasons.  Assumptions that stood 2 years ago may have varied or things may have happened to the property that cause a deterioration.  Example of a property in East Anglia where we were told the agents were on top of problems, but when we had to step in there were some serious issues we had to resolve.  In the case of debenture led loans, balance sheet assets are liquid and things can change (such as in the plumber deal).  We do everything we can to ensure that lenders are covered but we can never guarantee there will be no loss, even when we take security. Collect outs can be complicated and doing the wrong thing can jeopardise the security.

Provision Funds
In benign market conditions, a low level of provision fund should see the lenders well covered.  When markets turn, that's when we will see their value.  RBS held equity (the cash they needed to hold to offset possible losses) of nearly 5% but still had to be bailed out.  Will provision funds of 1%-3% be enough or does it matter more about potential losses and the coverage the PF gives.  We don't measure PF by % but by the coverage of expected losses.  Yes expected losses are theoretical which is why we have a 3x coverage in case we have got it wildly wrong.

General comment
P2P is an investment. There are no guarantees, there are no Government insurance schemes.  As with any investment you stand the potential to lose money in some situations.  I often think the platforms are given a rough ride when losses of 1% across a portfolio are incurred, yet yields have been 5%-10% so a net gain has been made.  Invest badly in the stock market and you stand to lose a lot more.  

No platform is perfectly safe.  Just because there is security or there is a provision fund does not make it a sure fire winner.  Those who have invested in P2P long enough will have seen some of the very early platforms get things very wrong.  Then there was Trust Buddy....

Finally, everything our team do is aimed at ensuring losses are kept to a minimum.  Every single person at AC knows it is your money at risk and not ours.  If we want to keep you coming back and investing, which results in us making money, then we have to ensure we give a competitive product and keep losses down.  Random statements saying we are at the mercy of capitalism and only in it for ourselves is fatuous.  Our team live by Fairer Growth Together.  That means all stakeholders, not just the shareholders.  As a shareholder I am interested in the profitability and future growth of the business.  As a lender on the platform I want a fair return for the risk.  As an employer I want a safe place for my team with a future where they can grow and develop with the business.  What we have done at AC is build mechanisms that work for all stakeholders.  That means that my team actually get financially penalised for loans that create losses.  If our lenders lose out, so do the team that originated the loan.  In a capitalist mechanism, that wouldn't happen.

AC isn't perfect and I would argue no platform is.  What I do think though is we offer something for different types of investors, we offer a transparency and openness not seen in other platforms and we do not mask problem loans or try to hide losses.

I'll finish with my usual comment.  If you don't like what we offer, then thank you for your business but you are under no obligation to keep using AC.

I have some more questions to which there is no information on AC's website:

1. Where does the Provision Fund hold its cash or what does it invest in? How will the coverage ratio be affected if default rates rise, especially if the PF itself holds monies in loans: what is the default rate needed before the cover disappears?


2. Default assumptions: "At Assetz Capital we believe that just under 6 in every 100 loans will have future problems in normal economic conditions and this is in line with credit rating agency data for SME business lending. This is known as the probability of default. Some of our borrowers have as high as a 10.00% chance of having problems, some as low as 3.50%. On average it is currently around 5.75%."

How far does the SME business lending data go? Is this data available somewhere for study? "We believe" is not the best wording, esepcially when it comes to statistics.

1 - It is held in Assetz Provision Funding Limited and is held as cash.  That cash is not invested in other loans or in other investments.  We constantly monitor default rates and expected losses and adjust the PF as needed.  Coverage levels are here (at the bottom) link

2 - There is historic comparable data available from Moody's et al for the last 50 or so years.  At the top end of the SME market you are looking at B rated entities and at the bottom to unrated entities.  Current B's are running at c3% but jumped to c10% in 2008, unrated are running at 12% but jumped to 45% in 2009.  We do not deal with the very bottom of the market as our deal sizes of £100K plus rule them out.  We also test against other data including comparable data provided by the likes of Experian and Equifax.  It certainly isn't a thumb in the air.

1. So for every £100,000, AC holds about £1289.6 in cash? (=(100000*0.32%)*4.03) 
(0.32% is the expected loss and coverage is 4.03 of that: is this right?)

I was previously struggling (and still am) to see why the investor would not be better off to hold 50k directly in AC loans at 12% and 50k in cash for better liquidity protection?

2. Where can I obtain this study? (Just a note that not every recession is the same: for example the 2000-2003 crash was kind to high yielding large cap shares. 2008 crash had also some exceptions. When a bubble bursts, it usually affects the most overpriced asset class first and only later, it infects and takes down other sectors or classes (usually due to required liquidity)).

Or are you quoting from a study on corporate bonds? In any case, given the data, why does AC assume a loss of 0.32% going forward when data points to around a 22% average loss? (between the unrated and rated securities during a recession: I guess AC will be somewhere in the middle?). This would assume a PF of £22,000 for every 100k is needed to assure investors of liquidity during hard times.

andrewholgate ,

I have to say I am surprised at this rather unprofessional response. I am sorry if you feel 'scrutinised', I am simply trying to understand the risk profile of investments that I invest in. I am starting to seriously lose faith in this platform based on the responses I have received so far and degree of hostility when pointing out what to me seem obvious flaws in modelling risk. Moreover the way the replies are worded, I am beginning to worry that the responses by reps here are designed to control group-think rather than provide helpful and transparent information..


I am going to try and ignore the unnecessary snipes for the sake of other investors who may benefit from more information. I know I would.

The data going back hundred odd years is available from Barclays: wealth.barclays.com/en_gb/smartinvestor/better-investor/investing-lessons-from-114-years-of-data.html

I used to pay for it about a hundred quid if I remember correctly and it is very useful. The default rates of various corporate bond bands are also in the public domain, there is nothing secretive about it. (Corporate bond is a loan made to a large business, in case my "jargon" offends anyone

I do not know whether default rates specific to SMEs, development and bridging finance are available as a separate study. Possibly not, because there is not enough data (or any data in fact as it's a fairly new market) so relying on corporate bond default rates throughout history is the next best thing. Can you explain why you are dismissing this data as irrelevant?

All I am trying to do is establish where the Assetz Capital loans fall closest to on the risk spectrum, on the scale of AAA to CCC in the corporate bonds market. Perhaps somebody more qualified could give me a competent answer? Clearly AC loans are more risky than AAA bonds issued by large caps because SMEs are significantly more prone to failure than, say, Glaxo or Shell. I have not implied they are all junk territory as I don't know. However the kind of loans that are lent out to businesses at double digit yields are precisely in the CCC/non-investment grade. Or are you arguing otherwise? Does the Monte Carlo machine know something that everyone else has missed in the last hundred years? I don't get it.

Please see this graph of CCC-rated debt or below: fred.stlouisfed.org/series/BAMLH0A3HYC
Current yield is (surprise surprise) 12%. Please expand the graph and you will see that in 2008, the yields jumped close to 50% for these securities. AC loans and p2p loans in general may be safer (why do they attract same or higher yield then?) but
fabricating an account that invests in the same securities that yield 12% and assigning it a 3.75% yield is akin to putting lipstick on a pig. It is still a pig (no offence to pigs, they can be lovely animals). I think it is people's basic right to understand what they are investing in. Just because you feel that some of them are stupid or don't want to understand what they are investing in, doesn't make it more suitable for them. I am now more worried that the company itself may not entirely understand how the account works and why it may be risky.

I am trying to understand why AC is solely relying on the 0.32% loss rate figure with such confidence, call it "conservative" and ignore a wall of data, spanning over a century, that clearly proves otherwise? And then have the audacity to maintain that because they paid for their own data, it must be true and nobody else is allowed to look at it? The 22% I took was the average from your post above, between best and worst graded securities during best and worst of times (which corresponds to the corporate bonds data I linked to almost precisely). How does one reconcile the 0.32% loss rate with the default rates you are quoting? Perhaps you assume that recovery rates will always be able to bring the default rates down substantially. (The link with data I linked to previously, takes recovery rates into account.)

"You mention the simulations running only over the period that AC has been trading."

No I think you know this is not how I meant it. Any model in finance (apart from the crystal ball one) looks at how investments behaved in the past in order to simulate future behaviour (please correct me if your model is different, I think everyone would be interested to know how this might be the case. I was asking whether your model was taking into account last 3 years or last 50 years in order to predict future behaviour of loan default rates. I wasn't asking for the recipe of the secret elixir of life, for goodness sake.

We are adults here: please can we stop the ad hominems and focus on raw data. Only this way can investors make an informed decision and only this way can a company gain investors' trust.