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Investors sneeze at P2P trust’s ‘seasoning’

Manager of P2P Global Investments blames maturing loan book for its poor performance last year. Will investors give it another chance?

Investors sneeze at P2P trust’s ‘seasoning’

P2P Global Investments (P2P ) has pinned some of the blame for its poor performance on the maturing or ‘seasoning’ of its £840 million loan portfolio.

P2P, the largest of the alternative lending investment trusts on the London Stock Exchange, saw its share price plunge 20.7% last year. This was bad news for shareholders, including star fund managers Mark Barnett and Neil Woodford, who in the previous two years pumped over £700 million into the fund, which invests in loans from peer-to-peer lending platforms.

Even including its quarterly dividends the total loss to P2P shareholders in 2016 was just over 16%.

The performance of the underlying portfolio was much better, but with a total return of just 4.1% from its assets falling short of its 6-8% dividend target, investors grew disillusioned and de-rated the shares, which now trade at a 20% discount below net asset value.

Simon Champ of MW Eaglewood Europe, P2P’s investment manager, said the poor performance was a result of increased ‘delinquencies’ by borrowers defaulting on their loans.

However, he stressed the rise in defaults was not unexpected and reflected the fact the trust had hit the mid-point in the borrowing cycle when the level of arrears increased.

Speaking at an event organised by the Association of Investment Companies, Champ explained that the average length of a loan held by the company was three years. It was in the middle of the three-year period that was most dangerous for creditors as loan matures, or ‘seasons’.

‘If you lend someone money to buy a car then they will not default in the first month,’ he said, adding that people ‘are not going to default in the last year’ either and will ‘always find a way to pay’.

This left the middle years of the loan more exposed to defaults. ‘”Seasoning” is expected and it is what happens to any loan,’ he said. ‘It happens as a loan becomes mature.’

P2P’s run of sub-par monthly returns saw it make a return of only 0.67% in the last quarter of 2017. In addition to higher loan delinquencies, it faced higher borrowing costs as markets priced in rising US interest rates.

Nearly 60% of the fund is invested in the US, which also meant P2P faced a sharp rise in the cost of hedging out currency movements after the pound dived against the dollar in the wake of the EU referendum.

The increase in defaults in the last three months of 2016 was largely in US consumer loans, which makes up 56% of the portfolio.

Champ said the large consumer weighting was a legacy of its 2014 launch when there were fewer platforms to invest in and US-based Lending Club was offering the highest number of loans for investment.

‘When we started, Lending Club was the biggest peer-to-peer lender in the world; it was one guy supplying 90% of loans…and on day one we had 90% US consumer loans. We got to less than 50% but then the dollar rallied. We will come to a more natural place where the US consumer loans are around 30%,’ he said.

Lending Club was hit by the shock departure of its founder last year, a move that added to investors’ nervousness over the untested sector as Swedish platform TrustBuddy collapsed.

With returns deteriorating, investors also objected to P2P’s high charges, particularly following the launch of rival Funding Circle SME Income (FCIF ), which levies no fund fees other than the 1% annual cost of accessing its parent’s loan platform.

Last June P2P bowed to pressure and cut its charge from 1% of gross assets, which included the trust’s borrowings, to 1% of net assets, a smaller number that excludes borrowings, with a 0.5% charge on assets bought with leverage.
Champ said he was now looking to invest more of the in peer-to-peer trade finance loans ‘maybe in mainland Europe’, he said.

He said P2P’s consumer loans were at the ‘prime’ or higher quality end of the investment spectrum and therefore would be less exposed to a downturn in the economy.

‘Consumer loans are driven by unemployment,’ he said. ‘Large scale global unemployment is a problem, although we invest in the prime end of the curve and [lend to] people who are most likely to remain in employment.’

He admitted ‘if we see a crisis like in 2009 I do not think we would make much money but we would strive not to lose any’.

However, Champ said the backdrop was good, with unemployment at an all-time low in both the UK and US, ‘which means people have been in a job for a long time so they have had time to build up other savings’.

Analysts such as Numis, Jefferies and JPMorgan Cazenove have begun to warm to the stock recently, seeing value in the wide discount, which P2P has sought to reduce by regular share buy-backs. However, they all agree only a sustained improvement in the monthly returns from the portfolio will trigger a re-rating and a narrowing in the discount.

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