P2P Investment Strategy Part 3 – Performance Management

Having touched on diversification and loan selection of my peer to peer TruePillars investment strategy, I wanted to go through the final aspect of strategy - performance management.  Performance management is an important part of any investment strategy to ensure the health and returns of your investments.  As it relates to peer to peer lending, these are the three areas I’m focusing on:

• Tracking Loan Status
• Managing Loan Risk
• Tracking Portfolio Performance 

Tracking Loan Status

While care is currently taken in selecting loans existing loans, I keep an eye on the individual performance of all loans in my portfolio.  To do this I monitor the investments tab of my TruePillars Dashboard available once you have logged into your account.  Here you can see all the loans you have made as well as their current status.  I’ve noted three different statuses of loans. 

• Green – Loan is active and all repayments up to date
• Blue – Loan payment is been processing
• Red – Loan payment is overdue

There is a fourth category Irregular but I’ve not see this status as yet. I have noted that a loan will be considered active when overdue payments are paid up to date.  What I am looking for are loans that are overdue or irregular.

Managing Loan Risk

To manage risk, my plan is to sell my stake in loans which have late payments.  While there may be many reasons why a business pays late, my assumption is that there is a cash flow issue (they don’t have the funds available when the monthly loan repayment is due).  I see this as a higher risk to future cash flow problems and thus want to minimise my exposure to these loans.  Having just experienced my first late payment on a loan, I’ve learnt you can’t sell your stake until the next payment made is on time. 

Based on this requirement I’ve created myself a watch list of loans I want to divest from at the first available opportunity.  In the short time I’ve been active, I’ve noted plenty of people are willing to purchase this said risk, so I will keep you posted on how effective this strategy is.

Tracking Portfolio Performance

The Truepillars Dashboard has a great display of general performance.  However there are two things missing from the dashboard that I would like to see:  total investment returns and loan diversification.  As such, I’ve created my own tracking spreadsheet to show these.  The reason why I calculate overall fund performance is because the dashboard gives you return on funds actively invested in loans.  To me this is not an overall reflection of your portfolio performance given cash in your TruePillars account earns no interest.  To maximise my returns I try to keep reinvesting available cash into new loans as soon as I can. 

For diversification of loans, I have developed a 100% pie chart to display visually.  This is so I can clearly see the percentages of my biggest loan exposures and how I am moving towards reduced individual loan exposures.

To begin with I’ve focused on a few key elements of my performance management strategy to keep it simple.   By focusing on loan statuses and overall diversification, I know where my risks are and what my maximum exposures are.  While this is my starting point I’m currently developing some additional reporting around where I’ve lent money to gain an insight into the industries, sectors and locations.  While I’m not using this data at the moment, I plan to use it in the future to help me track what market segments I may want to reduce exposure to due to poor performance.  This is where I’ve started my journey, interested to hear if people approach it differently.

P2P Investment Strategy Part 2 – Loan Selection

Diversification plays a large part of my investment strategy (P2P Investment strategy - Part 1) and while it is important, I believe you can further minimise the risk of loan default by selecting loans with businesses that appear to have stable fundamentals.  TruePillars offers two markets for loan investments, new business loans which are filled via the auction process and the secondary loan market where investors can sell their current loan investments to other investors.

New Loan Selection

Currently I’ve not been overly critical with reviewing and bidding in the auction process for new loans that have come onto the market.  My thought process behind this current strategy is that I believe new loans should be lower risk in the first few months / year (I’ll keep you posted on if I’m right…).  I’ve also taken this approach at this point in time to create diversification of my portfolio.  TruePillars also offers the ability for me to sell my investment to other investors if I deem it doesn’t fit my risk profile later.  Having observed a fairly active trading of existing loans, I don’t see the potential of been stuck with a loan I don’t want as a high risk at this stage.  In the future I may review this strategy and be more selective in my choices if I find I’m having to sell off too many loans.  There is a cost to sell a loan so you ultimately want to aim to hold the loan until it is paid off to maximise your returns.  

Secondary Market Loan Selection

While one could say I’ve taken a pretty lax approach to new loans, I’ve been much more selective on purchasing existing loan investments via the secondary market.  This is because I view existing loans as potentially carrying more risk.  The longer the loan has being issued, the more chance of borrower circumstances changing which may affect their ability to pay back the loan.  In assessing these loans I consider four main items which can be found on a loan information page on the TruePillars website

1. Repayment history (Loan history tab)
2. Loan Size / Term (Summary tab)
3. Net Profit after Tax (Financials tab)
4. Net Assets (Financials tab)

When it comes to the repayment history, I’ve currently don’t consider loans that have had any late payments.  The reason for this is, rightly or wrongly, I interpret late payments as potential cash flow issues which could affect future loan repayments and the ability of the company to continue to operate. 

If it passes the no late payments test, I then look at net profit after tax.  Here I’m looking for a trend of growth.  Note the most recent figures for profit may not be a full year’s figure and hence not an apples for apples comparison for the previous year’s results provided.  A quick method to assist is to divide the value by the number of months it covers over the financial year and times by 12. For example, if the latest results cover up to the end of February, then you divide by eight (July to February) and multiple by 12 to give you an indicative figure of full year results for comparison.

I then look at the net assets to see if the business the potential value to cover the loan.  If the net assets exceeds the value of the loan, there is a potential in the event of default for the outstanding loan to be recovered from the assets of the business.  Where there isn’t sufficient assets, I look at the net profits to see if there is sufficient profits to cover the full value of the loan with two to three years.  Having a healthy profit indicates to me that the business shouldn’t have any issues meeting their loan obligations.

I hope this is helpful and gives a bit of insight into how I’ve selected the loans that currently make up my TruePillars portfolio.  Interested to hear if other people have a different approach or whether they agree or disagree with my approach.  My next blog will touch on the third part of my strategy around Performance Management.

P2P Investment Strategy Part 1 – Diversification

I picked TruePillars as my initial lending platform specifically for the ability to choose individual loans to allow for full control over my portfolio.  This will allow me to build up my portfolio in a manner that I am comfortable with.  The first strategic goal for me is to develop diversification.  Peer to peer lending is diversification from other investments such as shares or property, however within every investment class there is an element of diversification to minimise risk.  In the case of peer to peer lending, diversification is ensuring your money is spread across as many different loans as possible.  By doing this you reduce your exposure to any single loan defaulting and still make a profit from the remaining portfolio of loan investments.  While diversification on the surface may seem fairly straight forward, it is important to have a plan as to what diversification looks like to you and how you intent to achieve it. 

There are two main elements to my diversification strategy:

1. The number of loans and the collective percentage of my investment in each (exposure)
2. The range of industries I’m lending too

Exposure of your loans

My current focus is a short term target around the quantity of loans I’m involved in.  Presently I’m aiming to achieve no loan at greater than 5% of my total loan portfolio value which I plan to accomplish over the first few months of investing.  To put this in perspective it means I need to acquire a minimum of 20 loans of equal value to make up my portfolio.  There are several important reasons why you should think about and set you own exposure target.  The main reasons are

• Helps define your maximum investment per loan
• Helps define your total minimum investment required
• Helps keep your total portfolio profitable in the event of a single loan default

I’ll use the TruePillars site to give an example of what your portfolio would look like considering the above.  TruePillars have a $50 minimum investment into new loans.  If we set this as our maximum investment per loan, we will be able to calculate how much money we need to invest across multiple loans to achieve the target diversification.  Put simply you need to invest $50 x 20 loans = $1,000.  Sticking to the maximum individual loan amount while increasing the number of loans post your target will further lower your individual exposure.  I’ve set my target per loan and I don’t plan to exceed it regardless of the size of my portfolio.  If you are concerned about any one investment, you can calculate the individual loan exposure by taking the value of the loan and dividing it by the total value of all loan investments.

What I’ve experienced is it was not possible to meet my diversification target when I first started investing.  This was because there was insufficient new and existing loans available for purchase and it’s something you may experience too when first starting out.  To overcome this, my plan is to regularly add capital and buying new and existing loans as they become available.  While I’m not quite at my diversification target yet, I’m well on my way with what I’ve found to be a fairly active new and existing loans market.

Minimising individual loan exposure is important when it comes to overall portfolio performance.  Ultimately you want the overall returns to exceed any losses you may incur from a loan default.  Given TruePillars performance is indicated at 9% returns and has a current overall performance of 12%, a 5% exposure means even if one of my loans defaults, the most at risk is 5%.  This potential loss should thus be covered by the overall return of the rest of the portfolio.  As my portfolio grows the impact of a default reduces, providing I stick to my maximum individual loan investment limits.  It also ensures that my portfolio remains more profitable overall.

Diversifying the industries into which your loans go

My secondary strategy for diversification is to deliberately consider the industry sectors of the loans I am investing in.  I’ve not currently tracked how this has progressed to date, however I’ve managed to achieve reasonable diversification from automotive to food services, from recreational sports to building services and a few other sectors in between.  Having exposure to different industries means you should have less risk in the event of market disruption to a particular industry that may affect their ability to pay back a loan.

Ultimately the goal of diversification is to ensure all your eggs are not in the one basket, quantitatively in terms of the amount of your loans, and qualitatively in the types of loans you’re contributing to.

Now that we have covered the basics of my diversification strategy my next blog will talk about how I’ve selected the loans I’ve invested in and what I look for when I assess whether to invest or not.   This journey is only beginning and I’m sure the path will change as I adapt and refine the strategy as my lending experience grows.   Interested to hear other people’s strategies and approaches as collectively we can learn, grow and succeed together.

First user experiences of TruePillars

Signing up to Truepillars was a very straight forward process, entering in an email address and password.  You then select what who you are wanting to invest as (an individual, a trust which includes self-managed super funds or as a company).  From there it’s a matter of stepping through a series of straight forward questions (Name, address, tax file number, etc) to register your account.  All of which took mere minutes.  After that the next set is to transfer some money into your account via BPAY so you can start trading.

Once the money hits the account you are ready to invest.  It is important to note any money sitting as cash does not earn any interest.  Thus to maximise your returns, it is best to buy into loans as soon as possible.  When I set up my account there were no new loans to bid on.  So I looked at the secondary marketplace to see what loan portions people were selling off that I could invest in. 

Just to explain the difference, a new loan is a loan put forward looking for investors to fund it.  It is done via an auction style system starting with the highest interest rate on offer and working down the range.  Once fully funded, bids start lowering the interest rate on offer to buy into the loan.  This effectively “out bids” another investor or in layman’s terms, you are offer to invest funds into the loan at a lower rate of return then someone else.  At the end of the auction the Business who has applied for the loan is offered the weighted average interest rate of all winning bid investors.  The secondary market place is where loans already funded through the auction process can be “cashed out” by investors.  To achieve this, you need a new investor to buy your stake in the loan you want to cash out of to ensure the loan remains funded to the business.  With the above in mind, I have observed the secondary market place is reasonably active with investors buying and selling loans regularly. 

I’ve also found you can browse the marketplace (both new and secondary) without an account including what is for sale and the general details of the loan.  However to view the additional information such as the financial statements and loan repayment history you need to log into your account and have made a deposit that has cleared into your TruePillars account. 

Looking at the secondary market place and reviewing the different loans currently on offer I bought into three different loans in completely different industries with varying interest rates and remaining loan terms.  The process was very straight forward by selecting on the listing amount you wanted to purchase and clicking on the button to purchase.  The money is detracted from your available cash and the loan investment is now yours earning you the interest on the loan. 

When you are logged in you can view a dashboard which provides several different tabs detailing elements of your portfolio of investments.  The summary page gives you a great overview of where your portfolio sits, from available funds to invest (cash), live bids and pending loans (bids won but awaiting issue to the borrower) and funds invested.  I also like the running total of interest earnt since becoming an investor and the weighted average interest rate you are receiving on all the loans you have invested.  I also like the investments tab which shows all your loans listed out along with when the next payment of capital and interest is due.  Dropping down the loan details on the right you can also more details about the loan including the break up between capital returned and interest received.  The report tab gives you the ability to run a number of reports giving you an overview or details of your investments to date.  There is the ability to set up auto-bidding on new loans but I’ve not tried this function yet. 

Overall, from my first user experiences, I’ve found the TruePillars site to be super easy to use.  This included making your first investment buying a loan to reviewing your current position via the dashboard.   Happy to hear about other people’s user experiences of the Truepillars platform.  Now that I’ve had a chance to see how the site works and how easy it is to purchase investments I’ll start to explore and document the different strategies I’m looking to maximise my returns.