Be careful what you wish for. Investors seeking to exposure to the equity (share) value of the peer-to-peer (P2P) alternative-finance sector have been able to get in early via investment trusts committed to the area. The experience of the early adopters however has not been a comfortable one.
The explanation is simple. Some P2P platforms have opted for growth as a priority over security. At Money&Co. we have taken the route of slower growth – and a loan portfolio that is among the very best in the sector, with a default rate of under 0.25 per cent er annum since loan facilitation went public in April 2014.
Our lenders have averaged over 8 per cent gross (we take a one per cent fee) over this period.
Fund managers Mark Barnett and Neil Woodford and other investors in P2P Global Investments (P2P) are having to be patient as the turnaround in the UK’s first listed peer-to-peer lending fund takes longer than expected.
Annual results published yesterday showed the £632 million investment trust delivered a 5.21% return on net assets last year, up from 3% in 2017 when Pollen Street Capital, manager of rival Honeycomb (HONY), took over the struggling loan portfolio.
That performance masked the disappointment of the company not hitting its dividend target, however. In November 2017 P2P, which lends shareholders’ capital through lending platforms, set a target of paying a covered 15p per share dividend by half way through 2018.
In the end P2P, in which Barnett and Woodford hold stakes of 33% and 14% respectively, paid total dividends of 48p per share. This was up from 47p the year before, but at a quarterly rate of 12p. Worse, the first three dividends of the year were uncovered by earnings although the fourth quarter payment was covered by reserves and offers a comparatively high yield of 5.8%, according to Numis Securities.
8% Yield Loans -Latest
As ever, we’ve made our best efforts in due diligence and credit analysis before awarding this loan an A rating. However, we cannot warrant that the representations of the borrower are true – though clearly we believe them to be so.
A Process Guide To Innovative Finance ISA Investment
Money&Co. lenders have achieved an average return of more than 8 per cent gross (before we deduct our one per cent fee). That figure is the result of almost £15 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital.
All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.
So here’s our guide to the process:
The ISA allowance for 2019/20 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.
Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.
Risk: Security, Access, Yield
Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.