Investment trusts focusing on the peer-to-peer (P2P) lending sector present an opportunity to access a rapidly growing part of the market and an attractive source of future returns, according to Cantor Fitzgerald’s Monica Tepes, although investors need to be cognisant of the risks of this nascent area.
P2P lending is one of the UK’s fastest growing markets as borrowers turn to online platforms rather than conventional lenders for unsecured loans while lenders are offered very attractive rates of return in an otherwise low interest rate environment.
Data from the Peer-to-Peer Finance Association shows that some £3.7bn had been loaned out by P2P platforms by the end of the third quarter, spread across 225,064 borrowers and funded by 121,441 lenders.
Source: Peer-to-Peer Finance Association
The strong growth of these online platforms has led to a number of fund launches specialising in this area and Tepes, investment trust analyst at Cantor Fitzgerald, believes they offer a compelling opportunity for investors with already diversified portfolios.
“This could possibly be the next big thing. You’ve seen how popular infrastructure has been over recent years and I think it could be bigger than that because of the sheer amount of loans that are out there,” she said.
“I think this is a great story. There’s hundreds of billions of loans that originated from conventional lenders while less than 1 per cent has been originated by online platforms. If you think of how much online lending can increase from the current market share, there’s so much room grow.”
“The story behind it is also something people can understand: bank disintermediation, technological innovation and the cost savings created by the move online. If you have a situation where both the lender and the borrower are better off, you can see why money could move away from the banks and towards these platforms.”
Cantor Fitzgerald currently has a positive view on two P2P trusts – P2P Global Investments and VPC Specialty Lending – and is reviewing others in the area.
P2P Global Investments, which is managed by Eaglewood Capital, was the first listed fund to focus on investing in platform-originated credit assets and raised £920m within its first 14 months. It also caught the attention of professional investors with the likes of Woodford Investment Management, M&G Investments, Aviva Investors and Newton Investment Management putting money into the offering.
VPC Specialty Lending is run by Victory Park Capital, which Cantor Fitzgerald notes is “one of the largest players” in the direct lending space and has been involved in online leading since 2009. It has a market cap of £382m, having launched in March 2015.
Tepes said: “These trusts offer an attractive dividend targeting around 8 per cent and on top of that there’s an estimated total return of 10 per cent plus – given what else you can get out there, that looks very attractive.”
Data from the AIC shows that the yield of the trusts seems attractive: P2P Global Investments’ is 6.1 per cent at the moment while VPC Specialty Lending’s is 7.9 per cent. However, their total return records – while over a short time frame – are more lacklustre.
Since launch, P2P Global Investments has lost 3.08 per cent and underperformed its average peer in the IT Debt sector (which includes more than P2P trusts). Over time, however, the portfolio’s net asset value (NAV) has increased 3.43 per cent but the loss has been caused by the 7.01 per cent drop in its share price; it’s now trading on a 3.7 per cent discount.
Total return of trust vs sector since launch
Source: FE Analytics
It’s a similar picture with VPC Specialty Lending: while it’s NAV is up 2.68 per cent since inception, the share price has fallen 1.03 per cent. This means it has posted a 0.16 per cent loss in total return terms – beating the sector’s 2.57 per cent fall – and is trading on a 4.8 per cent discount.
Tepes concedes that the sector is in its early days and that there are risks for investors.
“Of course, some people love this story but others won’t touch it because there isn’t enough information on how these investments have done across a full credit cycle,” she said.
“That’s where the risk is in these investments but it’s very unlikely you’d get an 8 per cent yield and 10 per cent total return from something without any risk.”
Things to watch as the sector evolves include more portfolio data and detailed performance attribution, in order for investors to learn how they will perform in different environments. Particular issues to be attentive of include default levels compared to expectations, gearing levels, dividend cover and how re-investment opportunities are used.
“You certainly shouldn’t put all your pension in it but I see no reason why it shouldn’t be a small portion of a diversified portfolio,” Tepes said. “The managers seem to be credible with good stories, but you don’t have the track record to see how they have performed over the longer term.”
Richard Troue, head of investment analysis at Hargreaves Lansdown, agrees that the performance potential of P2P trusts make them attractive in the low return environment but stresses that a degree of caution is needed.
“Anything that offers a half-decent yield is going to be pretty popular with income; we’ve seen a lot of investment trust issuance in the alternative income space over recent years. Infrastructure has been very popular and now we’re seeing the rise of peer-to-peer lending,” he said.
“On the face on it, it does have some headline yields that would appeal to investors but it just hasn’t been tested yet. Until we see how these investments perform in a severe downturn it’s hard to become very bullish on them.”
“They might well be the next big thing and I’m sure they will attract quite a lot of flows just off the back of those yields, but investors do need to be aware that it’s a relatively new concept and there’s no such thing as a free lunch.”
Troue suggests that any investors considering adding P2P funds to their income portfolio first ensure they have a solid core of conventional assets – such as UK equity income funds or bond exposure – and only then use these trusts as satellite holdings.
“I think they look interesting and over time they might prove themselves worthy of a more significant chunk of an investment portfolio, but I still them as being niche. Sort out your core holdings first and only then buy satellites like infrastructure and P2P lending.”
Do you have any views on P2P investment trusts? Are they an exciting new opportunity or a fad that should be avoided until it matures?
