My Thoughts On P2P Platform Bondora
|July 13, 2018||Posted by Oddmund Grotte under trading topics|
I have invested in eight different P2P platforms, and I plan writing some brief comments about my experience on all of them. P2P is of course a slightly different topic than the main topic on this blog, but hopefully many will find this of interest.
Bear in mind I’m a complete passive investor into P2P platforms. I just transfer money and let the auto invest do all my investment into each separate loan. My time spent on research on each platform is very limited. Hence, there might be some mistakes/misunderstandings or errors in this article. I’m by no means any expert. If you find anything that might add value or something that is plain wrong from my side, please drop me a line or use the comments section below the article.
The reason why I invest in P2P is diversification. The great majority of my investments are hedge funds, mutual stock funds and my own direct investments into stocks. And of course I still invest short term via my quantitatively approach, the main topic on this blog. Hopefully P2P is a good diversification, but I guess I will find out during the next recession. So far almost all P2P platforms has no history during a serious downturn in the economy (but I believe diversification works pretty well during normal times).
Now, before you read more you have to understand that P2P is a very illiquid investment. You invest into loans that can run over 60 months, or perhaps even longer. You either have to wait until the loan matures (or defaults) or sell it in the secondary market. If you want to liquidate in the secondary market, you can of course expect to pay a markup to the buyer. How much depends on a number of factors. Hence, you must only invest in P2P if you have a very long term approach. This article is of course not any recommendation to invest or not. You have to use your own judgement.
You also have to consider platform risk, ie. if the whole platform is a ponzi scheme or a fraud. The industry is still mainly unregulated (in my opinion regulation does not necessarily lower the risk), and it is relatively new asset class. Platform risk is my main concern, but I believe this risk is quite low with Bondora.
The first platform I Invested in was Bondora in the summer of 2016. Bondora is based in Estonia and was among the first in the industry. They started operations in 2009.
In total Bondora has processed more than 530 000 loan applications and issued over EUR 107 million in loans. In other words, each loan is on average pretty small (2300 EUR). Currently they issue loans in Finland, Estonia and Spain.
My Performance in Bondora
As mentioned earlier, I invest using the automation on the platform. To begin with I used the Portfolio Manager and set the risk level to Progressive: I’m willing to take a bit more risk and hopefully get a long term better performance. According to the Manager at the time my allocation into High Risk (HR) loans would be about 10%. However, in real life my allocation ended on 25%, a pretty high number. In total I have invested in about 4000 different loans.
So far my total performance is 12.75% but it’s decreasing because I get more defaults as my loans mature. This puts me into this bracket compared to all investors in Bondora:
Much to my surprise more than 12% of the investors has lost money on the platform. I suspect that is mainly due to investments in just a few loans, and didn’t have any real diversification into many loans.
My performance based on different loans is this (the left column illustrates the loan rating, AA is the best borrowers):
As you can see HR loans are performing a bit weaker than I would expect: 2051 EUR in interest income, but 1107 EUR is principal overdue. However, historically a lot of this will be recovered (see below).
When I look at the details to some of the specific loans, I’m quite surprised to see that a lot of the HR borrowers never paid principal or interest after the loan was issued! It went straight into default without a single payment. That is actually quite worrisome.
Total interest income minus principal scheduled but not paid is this:
As the chart clearly illustrates, I get a lot more overdue/default as time goes by. Since February 2018 net interest received has been less than 150 EUR a month. My account is currently at 24 500 EUR. 150 EUR a month equals 7.35% per year. I’ll have to wait longer to see if Bondora’s claims about return will add up.
However, the chart above does not include recoveries. Historically about 43% of the defaulted loans get recovered, so a default is not a complete loss. Recovery can take a lot time. Here is one example of that in one of my loans issued in June 2016:
My cash flow from recoveries is as follows:
As expected cash flow from recoveries increase as default increases (and time passes).
My account value has increased from 23 907 in January 2018, to 24 567 today. Net increase is 660 EUR, or 2.8%:
In April 2018 I stopped Portfolio Manager because HR loans are performing worse than I expected and I switched to Portfolio Pro where I can customize my loans a lot more, both in terms of risk and maturity. I’m also sceptical to HR loans if we head into a recession. In June 2018 I stopped auto invest all together because I want to transfer some of my funds to the new product called Go & Grow. I simply let my interest and principal payments automatically transfer to Go & Grow.
Go & Grow
In June 2018 Bondara offered a new product called Go & Grow. Personally I think the name of the product is a misnomer, but put shortly it gives you a lower expected return in exchange for a more liquid investment. To my understanding it works like this:
Bondora invests the deposits in loans already offered by them in the marketplace and you are not an investor in the loan. All the principal and interest payments from the loans go to Bondora and not to you, and in exchange for that you receive 6.75% interest. However, this rate is not guaranteed. Bondora has simply calculated a yearly return they are confident they can achieve, and at the same time deposit the difference in return they receive from these loans (the average net return on the Bondora platform is higher than 6.75%). To my understanding this surplus reserve will be kept as a reserve separate from Bondora’s funds.
Again, I emphasize this business model has never witnessed a harsh recession. Noone knows what happens if we see a return of the financial crisis in 2008/09. Hence, with Go & Grow you cap your upside, but has full downside risk.
So why do I want to use Go & Grow? It has two very good advantages:
- It is a very liquid investment. I can withdraw money on a daily basis.
- I defer tax payments to the day I withdraw funds. Interest accrues daily, but there is no realization until the day I withdraw.
An additional benefit is for investors from countries where you can’t offset losses against interest income for tax purposes. The 6.75% is of course net after defaults.
Even after two years it is still a bit premature to conclude. We can conclude it works reasonably well in normal times, but I emphasize the potential risk if we hit a recession. Bondora issues mainly consumer loans with not much collateral: refinancing, redecorating, education, transportation, business, travel, health and property are the most used loan purposes. I’m afraid losses will increase a lot in a severe recession, and the jury is still out on that one. I believe stocks are the best long term investment, and P2P should only be a minor investment in your portfolio.
This article is of course no recommendation. I’m no investment advisor.
If you do like to invest, feel free to use my referral link.