Tuesday, 30 October 2018

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.

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