Opinion – Retail appeal to marketplace loans

17-Feb-2017

By Rosemary Steinfort

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Consumer credit is emerging as a possible asset class for retail investors, potentially providing the elusive combination of both higher returns and lower volatility.

Large financial institutions have been investing in this asset class for many years through their exposure to various types of credit, including unsecured credit card debt.

This has yielded steady returns and capital preservation over a seven-year period that included the global financial crisis, with an average return of 10.9 per cent since 2007.

The diversification benefits of consumer credit in an investment portfolio are similar to fixed interest, but with the higher income characteristics – and the commensurate risks – of dividend-paying shares.

The risks associated with investing in consumer credit include credit risk and platform risk, and these may be elevated if there is a downturn in the economy and rising unemployment.

However, Australia’s unemployment rate has remained relatively steady at 5.9 per cent after peaking in 2015 at 6.3 per cent.

Recent Reserve Bank of Australia (RBA) data showed that non-performing personal assets, including credit card debt, are nearly 2 per cent of total non-performing assets at 30 June 2016. This figure remains elevated but manageable, according to the RBA’s latest Financial Stability Report in October 2016.

Consumer credit through marketplace loans can make a positive contribution to portfolios; investors have historically received regular, high yielding distributions, which may be better than traditional sources of fixed income (although past performance is not an indicator of future performance).

Additionally, although the income or capital invested in marketplace loans is not guaranteed, there is historically lower volatility for consumer credit when the risk is diversified.

The asset class also has a low correlation to Australian shares and traditional fixed interest, as seen with recent moves in long bond rates that has led to falls in value of some fixed interest securities.

The different Marketplace Lending models accessible to investors in Australia include the traditional peer-to-peer model offered by RateSetter and Society One, which frequently matches individual investors and borrowers over an online platform.

This model may allow investors to target returns within a certain level of risk, allowing for the fact that the higher the promised return, the further up the credit risk curve is the investment. It is more suited to investors who like active trading, and are happy to be constantly monitoring and reinvesting.

Retail investors can also access a pooled fund vehicle through DirectMoney, which is tailored for those who want convenience, familiarity and simplicity, while maintaining the potential return and low volatility benefits of the asset class. DirectMoney’s minimum investment amount is $10,000.

The pooled model diversifies risk across all loans in the portfolio, and investors can be earning in the first month. Any distributions can be reinvested or paid while, as with the first marketplace lending model, there is a minimum investment period.

Regulatory authorities require a product disclosure document to be issued to potential retail investors, so this delivers legal protection that may not be available on products offered to wholesale or sophisticated investors.

Rosemary Steinfort is research manager for DirectMoney

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