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Post by explorep2p on Aug 3, 2017 23:21:51 GMT
Hello Forum Some food for thought: We thought it may be interesting to model how bad economic conditions would need to get to justify investing in a (Zopa style) low interest / safe P2P product, versus a higher interest rate secured loan portfolio over a 5 year investment horizon. We estimate that if a severe global financial crisis hit during the next 5 years, and there was no impact at all on Zopa, the secured loan portfolio would be still be worth 23% more than the Zopa portfolio. In current conditions, the secured loan portfolio would be worth up to 46% more after 5 years. There's clearly a role for the Zopa style product, particularly as a short term alternative to bank deposits, but the risk and liquidity features come at a big cost over the longer term. Choosing a 'safe' P2P investment may be a terrible idea |
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jonah
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Post by jonah on Aug 4, 2017 5:11:38 GMT
What is 'normal level' for defaults? What we have experienced in the last 5-10 years would be low by historical levels.
Also 77% or 50% recovery on some secured lending is better than could happen.
That said, I agree with the underlying premise.
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Post by WestonKevTMP on Aug 4, 2017 6:13:03 GMT
As a risk manager that's worked at both ends of the risk spectrum, as the first CRO for RateSetter and now with The Money Platform (that's prime lending vs. HCSTC, not the risk of platform), I'd be interested in seeing the maths.
In the Scenario 2 - A huge crisis hits in 4 years time,
"Let's assume that property prices fell 40% in every country, and the default rate on Carol's loans reaches 50%. Carol also has to pay legal and administration costs equivalent to 10% of the value of the collateral she recovers. Her average recovery rate is 77% on the defaulted loans"
I'm surprised that the results imply €100,000 still turns into €149,000. It doesn't feel intuitively right.
Could you show the actual modelling and assumptions?
I think you're saying the this scenario is just for the final year, and for the first four years returns are as promised 12% AER. If so, this is not a realistic scenario, you have to assume longer pessimistic returns during that period, which I suspect would decimate any portfolio. This is not professional modelling, to imply you could coast for 4 years and get out when things went bad. Even one good year, followed by one year of bad would be terrible. Also you'd even have to take into account the long period for recoveries.
Kevin.
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macq
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Post by macq on Aug 4, 2017 7:34:50 GMT
The safe v risky question keeps coming up on the forum and makes for good reading.But at the end of the day the answer is always the same,people invest in the likes of Zopa because they feel safer in them.They already know that if they take 2.8% with RS v 12% with ABL they are losing out so they are not worried about what they are losing over 5 years or in a downturn.Its a bit like an investment manager telling people that in the next 10 years an emerging market fund will make more then a Uk tracker but a lot of people will go with the tracker because it feels safer.
In any form of investment any figures are historical or a guess based on said history but there are no guarantees.But based again on history people believe (may be wrongly)that the lower risk product has more chance of protecting their capital first before worrying about making a profit.Its why retired people take the dividends from shares and funds rather then putting money in that emerging market fund,they hope to preserve the capital which is the most important thing,but due to low rates on savings accounts is pushing people to look for other products
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Post by explorep2p on Aug 4, 2017 9:03:55 GMT
As a risk manager that's worked at both ends of the risk spectrum, as the first CRO for RateSetter and now with The Money Platform (that's prime lending vs. HCSTC, not the risk of platform), I'd be interested in seeing the maths. In the Scenario 2 - A huge crisis hits in 4 years time, " Let's assume that property prices fell 40% in every country, and the default rate on Carol's loans reaches 50%. Carol also has to pay legal and administration costs equivalent to 10% of the value of the collateral she recovers. Her average recovery rate is 77% on the defaulted loans"I'm surprised that the results imply €100,000 still turns into €149,000. It doesn't feel intuitively right. Could you show the actual modelling and assumptions? I think you're saying the this scenario is just for the final year, and for the first four years returns are as promised 12% AER. If so, this is not a realistic scenario, you have to assume longer pessimistic returns during that period, which I suspect would decimate any portfolio. This is not professional modelling, to imply you could coast for 4 years and get out when things went bad. Even one good year, followed by one year of bad would be terrible. Also you'd even have to take into account the long period for recoveries. Kevin. Hi Kevin There is a link to the spreadsheet now in the post. Fully aware that there are many different scenarios that could be run, particularly with regards to the timing of the stress event. There was also an implied assumption that defaults would be recovered within 12 months which (as you say) could be a bit aggressive. However we have also assumed that the safer product has no impact at all from rising defaults which is probably very optimistic. The point of the post was to demonstrate that the 'safer' products are not that safe if you have a longer term investment horizon and consider opportunity costs, even going into a downturn. Everyone will have a slightly different take on what stress scenarios to run and how big the difference in returns could be over time. The spreadsheet is up now so it's available to play around with.
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angrysaveruk
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Post by angrysaveruk on Aug 4, 2017 9:15:19 GMT
Personally I consider secured lending to be alot less risky than unsecured lending. And I would certainly prefer to be holding property secured business loans rather than high risk sub prime personal loans in the event of a financial crisis.
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ozboy
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Post by ozboy on Aug 4, 2017 9:18:42 GMT
Me, I prefer high risk sub prime Personal Loans, used to buy a very expensive car.    PS: Because I've never had a nice car before and this very friendly geezer/ette showed me how very cheap and easy it is! |
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jo
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Post by jo on Aug 4, 2017 9:29:53 GMT
Take your conclusion but I'd tend to deflate returns from the higer-rate interest platforms in the scenarios.
With the exception of Mintos, I've found it harder to (prudently*) deploy funds in high-rate platforms quickly - which tends to retard XIRR.
*Acknowledging this is subjective.
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oldgrumpy
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Post by oldgrumpy on Aug 4, 2017 9:32:48 GMT
Me, I prefer high risk sub prime Personal Loans, used to buy a very expensive car. PS: Because I've never had a nice car before and this very friendly geezer/ette showed me how very cheap and easy it is! Arthur Daley stills rules OK?  (geezerette??? you didn't actually see 'er indoors did you? )
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angrysaveruk
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Post by angrysaveruk on Aug 4, 2017 9:50:13 GMT
Me, I prefer high risk sub prime Personal Loans, used to buy a very expensive car. PS: Because I've never had a nice car before and this very friendly geezer/ette showed me how very cheap and easy it is! Unfortunately I suspect that is true of some of the lending going on. My gardener who probably doesnt have a very high income is driving a 30k car.
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ozboy
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Post by ozboy on Aug 4, 2017 9:51:40 GMT
Who said you can't live The Life of Riley, even on Benefits.
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macq
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Post by macq on Aug 4, 2017 10:01:08 GMT
Who said you can't live The Life of Riley, even on Benefits. is Riley the one who moved to jeopardy because he heard that's where 300 jobs were on the news?
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macq
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Post by macq on Aug 4, 2017 10:14:44 GMT
Me, I prefer high risk sub prime Personal Loans, used to buy a very expensive car. PS: Because I've never had a nice car before and this very friendly geezer/ette showed me how very cheap and easy it is! Unfortunately I suspect that is true of some of the lending going on. My gardener who probably doesnt have a very high income is driving a 30k car. have you checked your safe lately!
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angrysaveruk
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Post by angrysaveruk on Aug 4, 2017 10:43:49 GMT
Unfortunately I suspect that is true of some of the lending going on. My gardener who probably doesnt have a very high income is driving a 30k car. have you checked your safe lately! Dont have a safe but I would like to know where my lawn mower has gone.
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ilmoro
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Post by ilmoro on Aug 4, 2017 11:06:58 GMT
have you checked your safe lately! Dont have a safe but I would like to know where my lawn mower has gone.
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