The UK’s nascent peer-to-peer lending sector has attracted the attentions of a number of high profile fund managers.
The likes of star manager Neil Woodford, Invesco Perpetual’s Mark Barnett, and George Luckraft, manager of AXA Framlington’s Monthly Income fund, have all been tempted into this growing area of alternative finance.
Peer-to-peer allows investors to lend directly to individuals and businesses. In return, they receive an attractive yield - provided the borrower does not default.
Investors can gain exposure through a handful of investment trusts that have launched in recent years. This includes P2P Global Investments (P2P), the largest in the sector at £868 million, with a yield of 6.9%. It has a large portfolio of loans to consumers and companies, and can take equity stakes in peer-to-peer platforms too. VPC Specialty Lending Investments (VSL) takes a similar approach and yields 9.3%, while Ranger Direct Lending (RDL) lends to businesses rather than consumers and yields 10.6%.
Strong Initial Gains
Star manager Neil Woodford, for example, holds P2P Global and VPC Specialty Lending in the Woodford Equity Income fund, alongside a direct position in lending platform Ratesetter, which forms part of the fund’s unquoted allowance.
Initially, the new breed of peer-to-peer investment trusts got off to a flying start. Between May 2014 and October of last year, P2P Global’s share price consistently traded at a premium to its net asset value, which means the underlying value of the loans owned by the portfolio.
However, sentiment has since turned negative towards the sector. P2P Global’s share price has fallen 17% since October of last year and currently trades at a discount of 14.4% to NAV. Investors have grown cautious after it emerged that employees at the most prominent peer-to-peer lender in the US, LendingClub (LC), had changed information regarding loans to make them more attractive to investors. This led to the resignation of chief executive Renaud Laplanche and the cancellation of the company’s annual shareholder meeting on 7 June.
P2P Global buys loans from LendingClub, and initially saw its share price fall due to the relationship. The trust’s board responded with a statement, explaining that it does not buy the ‘near prime’ loans that are in question, only ‘prime’ loans from borrowers with good credit scores.
Time to Buy at a Discount
With most of the high yielding trusts in the sector now trading at a discount, is it time to back peer-to-peer?
Rob Burdett, co-head of the multi-manager team at BMO Global Asset Management, suggests that peer-to-peer can form a small part of a diversified portfolio – as long as investors understand how it works and what the potential risks are. He acknowledges that it isn’t for everyone, however.
The F&C MM Navigator Distribution fund, which Burdett manages alongside Gary Potter, has a 1.4% position in P2P Global.
“We are using it, in part, to plug an underweight exposure to fixed income. It serves a role as a diversifier relative to fixed income,” he explained.
While the issues at LendingClub may cause investors to adopt a more cautious view on UK peer-to-peer, Burdett points out that any new industry faces bad press as it evolves. Looking ahead, he remains positive about P2P Global’s backing from hedge fund Marshall Wace and its lending methodology.
“Depending on the platform they are using, they will have 30 to 40 more data points per lender and far more detail than a bank might have for a personal loan. It is a high tech way of assessing the risk of default,” Burdett said.
Positive Outlook?
Burdett and co-manager Potter recently increased their allocation to the trust when it was trading at a discount of 16-17%, viewing it as a buying opportunity.
“We have got some of the best investors in the country alongside us in these funds and the chief executive has gone on record saying all of his free cash is invested,” he added.
However, not all fund managers share Burdett’s optimism. Holly Cassell, assistant manager on the Neptune UK Opportunities and UK Mid Cap funds, is concerned that the sector has so far only flourished in an ultra-low interest rate environment.
“Until rates rise and credit conditions worsen, we have no way of knowing how peer-to-peer will fare; hence our caution on the sector and lack of any exposure in the funds," she said.
Trevor Greetham, head of multi-asset at Royal London Asset Management, echoes Cassell’s sentiments. If interest rates rise over the next few years, he would expect default rates to increase – posing a potential challenge to the sector.
“My concern is that the peer-to-peer lending vehicles are presented as the next step up from cash ISAs. The interest rates on offer sound like those quoted for a bank account, but this misses that they have risks that have not been tested through the economic cycle,” he added.
