Peer-to-peer investment trusts now have around £1 billion of assets under management between them, but the jury is still out on whether or not they are worth backing.
P2P trusts launched four years ago as direct peer-to-peer lenders including Zopa and Funding Circle were fast gaining traction. The trusts promised exposure to hundreds, or even thousands, of different peer-to-peer loans, in return for a juicy dividend yield.
Over a period when income has been hard to find, they quickly gained investor interest and many of the trusts started to trade at a premium to their net asset value.
Annabel Brodie-Smith, communications director at the Association of Investment Companies, says: “With interest rates at such low levels, demand for income has been strong and the P2P-focussed investment companies have been delivering considerable yields. The closed-end structure is particularly suitable for investing in these sorts of illiquid assets.”
But some investors have been sceptical. After all, it’s incredibly easy to simply go to a peer-to-peer website for yourself and choose your own range of loans to invest in. This can also be a cheaper route as most sites don’t explicitly charge savers for investing in peer-to-peer loans, while trusts will charge an annual fee.
Benefits of Outsourcing
But there are benefits to using a trust rather than going directly. Firstly, newbies who are daunted by the sector may like the idea of a team of professionals doing their due diligence for them. The management team can cherry pick which peer-to-peer providers they want to use and often which specific loans they want to back.
While many websites will spread investors’ cash across a number of loans in smaller chunks – a £1,000 investment, for example, might be broken up in 100 lots of £10 – the level of diversification an individual can achieve by going directly will be nowhere near what a £200 million investment trust can.
As well as that, a trust will be able to get exposure to loans from a number of different providers. This will be more difficult for an individual, particularly if they are looking to invest through an Isa. An Innovative Isa allows savers to access peer-to-peer investments tax-free but only one can be opened per person per tax year, so users must pick a single provider.
Finally, trusts offer investors liquidity in what is typically an illiquid asset class – if you sign up to a P2P website for yourself you will inevitably locked into your investment for a set period, whereas shares in a trust can be bought and sold at any time.
Simon Elliott, head of investment trust research at Winterflood, has been cautious on the sector since its May 2014 inception. He says: “Some have had fee structures that were not particularly shareholder-friendly and there is a lack of demonstrable track record for the asset class through a full credit cycle.
“A number of funds have undoubtedly failed to deliver on their IPO targets and the experience of investors has been disappointing, with funds now trading at significant discounts.”
A Word of Warning
One example which has not, perhaps, gone entirely to plan is investment company Ranger Direct Lending. Last month it served notice on its fund manager with a view to changing its focus to private, asset-backed debt. The company has been involved in a legal battle over clarifying the extent of its losses and has rejected a call from one major shareholder to wind up.
Ben Yearsley, director at Shore Financial Planning, says: “With Ranger Direct, it feels as though private investors have been caught in the crossfire of arguing institutional investors. At least in a trust structure you have an independent board looking after shareholder interests.”
The road for other trusts, however, has been smoother. Winterflood currently likes P2P Global Investments which has a dividend yield of 6%. Data from Morningstar estimates the trust has a net asset value of £942.7 million but it trades at a chunky 15.8% discount. Its portfolio is well spread, with around a quarter of assets in each of the US, Europe and the Far East and Developed Europe as well as 12% in cash. Its investments include consumer, SME, corporate and real estate loans.
Other options include VPC Speciality Lending, a smaller trust with an estimated NAV of just £89.5 million that trades at a 10.9% discount – it also has a meaty 10% yield. It invests primarily in the US in loans to both consumers and small and medium-sized businesses.
Meanwhile, the Funding Circle SME Income Fund trades at a 4.6% premium. The £103 million trust has a yield of 6.3% and focuses on lending to small businesses.
But Yearsley adds: “But why would private investors buy these trusts when they could just bypass the extra cost and put money directly with P2P or crowdfunding platforms? The argument for using them is diversity and liquidity, and the yields look attractive, but I’m not sure that’s enough to tempt me.”
