Have Investors Really Made Money From P2P Lending Funds?

Cliff is an experienced freelance journalist hired in as 4thWay's “Chief P2P Cynic” to give you the alternative view. Read about Cliff.

Typically, UK investors have two main options when it comes to lending out their cash via peer-to-peer (P2P) websites.

The first is to lend manually, making personal decisions about how much to lend and to which borrowers.

The second – which many lenders consider the easier choice – is to put money into accounts that automatically diversify (spread around) their lending across a wide range of borrowers.

Then again, there is actually a third option: buying into an investment fund that spreads money across a broad range of P2P loans, websites and even countries.

In other words, this fund does the hard work for you. But – as you'd expect – this service comes at a cost in the form of an extra layer of fees for the fund manager.

Introducing P2P investment trusts

Investment trusts (ITs) are a type of investment fund that raise money from investors by selling shares in the trust and then appointing a fund manager to invest this pot of cash. So it's like buying shares in a company and then that company uses your investment to buy loans through P2P lending websites.

All but a few specialist investment trusts can be held inside stocks and shares ISAs, allowing investors to earn tax-free returns on their income and on the profits (capital gains) they make if they sell their shares in the fund for a higher price than they paid.

Like shares in companies, investment trust shares move up and down due to buying and selling pressure, as well as the value of their underlying assets. In P2P lending investment trusts, most of their assets are P2P loans.

The total value of a trust's assets is called its net asset value (NAV).

Depending on various factors, this figure can be higher or lower than a trust's market value (the value of all shares issued by a trust). In other words, the trust might hold £100 million in P2P loans but the share price of the trust is such that the trust is valued at, say, £90 million or £110 million.

Thus, investors buy or sell shares of P2P investment trusts, rather than dealing in their underlying loans. You can do this via any stockbroker. (It's usually cheaper and easier to do use an online broker.)

As for fees, investment trusts typically charge yearly fees in the order of 1%, with a few trusts taking performance-related fees on top.

The ‘Magnificent Seven' P2P trusts

Currently, UK investors can buy shares in these seven investment trusts listed on the London Stock Exchange (shown in order of market size, from highest to lowest):

Trust	Market value	Share price	Premium/ discount	Return since launch
P2P Global Investments	£658m	800p	-17.54%	-8.66% 05/2015
Honeycomb	£358m	1,193p	19.15%	+30.85% 12/2015
VPC Specialty Lending	£295m	79p	-14.27%	-7.59% 03/2015
Funding Circle SME Income	£173m	105p	2.39%	+10.39% 11/2015
Ranger Direct Lending	£127m	771p	-28.35%	-10.64% 05/2015
Hadrian's Wall	£85m	107p	9.85%	+7.62% 06/2016
SQN Secured Income Fund	£51m	97p	-1.32%	+7.82%/ 09/2015

Source: FT.com. Closing prices on Thursday, 14 September 2017.

Now let's review three elements of these trusts in more detail:

1. Trust size

The giant of the bunch is P2P Global Investments, which has a market value of nearly £660m, while the minnow is SQN Secured Income Fund at a mere £51m.

Generally, the larger the size of a trust, the easier it is to trade its shares. This means that it may be harder to buy shares in the smaller trusts. This leads to a wider spread (gap) between the buying and selling prices.

You might, for example, buy at a cost of 100p per share in the trust, but sell at a cost of 94p, so you need to make 6p per share from the trust to recover your money.

2. Premium/discounts

The premium or discount is how much the share price has moved above or below the value of the P2P loans that the trust holds.

It varies widely from trust to trust, with the largest discount to NAV being 28.35% at Ranger Direct Lending and the largest premium being 19.15% at Honeycomb.

What this tells us is that investors are willing to pay a hefty premium to NAV to buy shares in Honeycomb, while shares in Ranger Direct Lending seem to be much unloved and trade at a large discount to its NAV.

This is because Honeycomb has performed much better since launch than Ranger Direct Lending, which has suffered from losses on loans.

3. Share-price growth

The stand-out winner in terms of share-price growth is Honeycomb which has seen its share price risen more than 30% since launching in December 2015. One thing that may be attracting buyers to Honeycomb shares is its target to pay an 8% yearly dividend (share income).

Given that interest rates are at all-time lows, this is a chunky yield for income-starved investors. With investors chasing that yield pushing the share price up 30%, investors are now paying more for the loans, which pushes down the dividend yield.

Think about it: if the fund and loans both start off being worth £100 million and paying 8%, that's £8 million in interest (dividends). But if investors are now willing to pay 30% more for the shares, the shares are now worth a combined £130 million. Investors buying at the higher price are still being told to expect 8% on the loans though, or £8 million, which means a yield of 6.2%.

Three trusts (P2P Global Investments, VPC Specialty Lending and Ranger Direct Lending) have share prices lower today than at their respective launches.

The largest fall so far is nearly 11% at Ranger Direct Lending, which wrote off several bad loans earlier this year.

Of course, shares rise and fall and past performance is no indication of future returns. Furthermore, the oldest of these trusts, VPC Specialty Lending, has only existed for 2.5 years, so it's early days yet for P2P investment trusts.

P2P investing is all about income

Now for the most important thing to note: for investors in P2P investment trusts, it's all about the regular dividend income that these shares pay. Here are the current yearly dividend yields for these seven trusts (from highest to lowest):

Ranger Direct Lending: 13.74%

VPC Specialty Lending: 7.86%

Honeycomb: 7.64%

SQN Secured Income Fund: 7.21%

Funding Circle SME Income: 6.24%

P2P Global Investments: 5.62%

Hadrian's Wall: 2.54%

As you can see, Ranger Direct Lending shares pay a whopping near-14% dividend, which is so high that it is surely unsustainable.

Five of these trusts offer dividend yields in the 5.5% to 8% range, which is very attractive to income-hungry investors.

Hadrian's Wall's yield is the lowest, at just above 2.5%. This trust was launched only in mid-2016, so its yield is expected rise over time.

So, who's made money from P2P trusts?

To answer the question in my article title, investors who bought into four trusts – Honeycomb (+30.85%), Funding Circle SME Income (+10.39%), Hadrian's Wall (+7.62%) and SQN Secured Income Fund (+7.82%) – at their respective launches have seen their share prices rise.

This delivers paper profits to those shareholders even before dividends are taken into account. Of course, the standout star is Honeycomb, which has outperformed the other six trusts by a country mile.

That said, even though shares in the three remaining trusts have lost money on paper due to their falling share prices, these losses will be largely offset by the cash dividends these shares have paid out over the past two years or so.

For example, total dividends paid or declared to date by Ranger Direct Lending are over 178p, which comfortably exceeds its share-price drop since launch. Likewise, total dividends to date are over 122p at P2P Global Investments and nearly 14p at VPC Specialty Lending, delivering positive overall returns to these shareholders.

Summing up, investors in these trusts since their respective launches have, by and large, made positive returns from these investments.

Each trust is different in terms of the types of loans it invests in, the platforms it invests through, its geographical spread and so on.

Hence, I recommend looking very closely at each fund before committing to buying its shares. A good source for more information on investment trusts and other funds is trustnet.com. Happy hunting, income-seekers and P2P fans!