How many P2P portals to include in your portfolio?

Since there is a significant amount of P2P portals now available compared to a few years ago, the question quickly arises – how many portals should you include in your portfolio? Is it better to focus on just a few portals, or should you attempt to diversify and reduce risk by including a large amount of portals? How does this change when the total sum of your investments gets bigger? Are there downsides to diversifying?

My current P2P portfolio

As time has moved, my P2P portfolio has changed a lot. I started, like many others with 100% Bondora, but have now completely exited it. I also tried Moneyzen, Viventor and Estateguru, which I’ve also not kept in my portfolio. It definitely took me a while to figure out a selection I like, and it’s constantly changing in time. Currently the balance is as follows:

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P2P investments currently make up 47% of my whole investment portfolio. This means, that from my total portfolio the rates are: OR 24%; CE 13%; Twino and Mintos ~5% each. As you can see the exposure to Omaraha is rather big, the exposure to other portals is significantly less.

Liquidity

As with all investments, something to consider is liquidity. With P2P investments liquidity mostly comes from two aspects – firstly the length of the projects/loans (for example Twino’s 1-3 month loans vs Omaraha’s 5 year loans) and secondly the availability of a secondary market (and the speed of trading there).

For me, I’ve decided that for now, liquidity is not a huge priority for me, which means that I’ve allowed my portfolio to move towards longer term locked-in projects. Omaraha does not have a secondary market, and while defaulted loans have a sell-back function, it’s still a rather long term investment. CrowdEstate is also a long-term prospect, since while the projects are generally 1-2 years in length, the portal has a right to extend the projects and there is no secondary market to allow for an exit.

However, a part of my portfolio I’ve still kept rather liquid and this part is carried by Mintos and Twino. With both of these portals, I can easily pull out money from in a matter of days, so if for some reason I need to move money to another investment, or have need for cash, then this portion of my portfolio allows me to do this.

Risk

Now, assessing risk is a tricky thing in the P2P business. While you can look at overall history of the portals, a lot of them are new enough to not have much of a track record. Both Twino and Mintos in theory should be relatively low risk, however since Mintos has at least one loan originator that’s in trouble (and might go bankrupt), it’s clear that things can still go wrong.

The most ‘stable’ part of my P2P portfolio is probably Omaraha, due to the length of experience they have, and the overall stability of the market. However, Omaraha is also prone to all kinds of radical changes (such as the interest cap instated last week), which means that the portal risk itself might influence your long term strategy.

Crowdestate is clearly the most risky part of my P2P portfolio at this point, due to both the type of investments (mostly real estate development projects) and the risk of the real estate market overheating. This means that I will not really allow the volume of investments to increase too much there, I’ve mostly hit the point where I reinvest returned money, and add in less than I used to.

Time expense

With every new P2P portal that you add, there is both an investment of time and money. You need to invest time to figure out how this particular portal works, and how to achieve the best results. Depending on the portal this might require quite a bit of tinkering. For example, Omaraha has been offering great returns, but the time investment in managing interest rates there was also quite a bit of work. In comparison to Mintos or Twino, where you could pretty much just cruise by, using the autobidder function.

Since I invest though my company account, then any new portal also means more bookkeeping, and additional tracking. This means that there isn’t really much point in adding in a portal just to put a couple of hundred of euros into it, it becomes reasonable to add in another portal once the investment is in the thousands already. This means that while I’m currently at 4 portals, it’s not unreasonable to add in a fifth, there just has to be a reason for it – either it offers some different level of liquidity; there is a significantly different risk profile (different sector, country etc.), or an attractive risk-reward ratio.

How have you divided up your investments?

Fraudulent loans in P2P – Omaraha example

One of the inherent risks of the lending business is the likelihood of fraud happening. People will always be motivated to try to get loans and not pay them back, and this isn’t something that’s limited to P2P – banks and other credit providers constantly try to improve their systems to stop fraud from happening.

However, when it comes to P2P a lot of portals have been rather tight-lipped about giving out any actual statistics for loan fraud, which is strange in the sense that it’s unlikely that no fraud has occurred. I remember from when I started out with Bondora, then the forums occasionally discussed some fraudulent applications, since back then it was possible to track the people you gave loans to because a lot of the borrower’s info was public.

Since then, when looking at Bondora defaults, then for quite a few you can see marked as “criminal proceedings started”, which implies fraud, whether it was giving false data, using someone else’s ID etc. For an investor this means that unless you are phenomenally lucky then you will at some point lose a bit of money to fraud.

Omaraha, the Estonian P2P portal had an interesting case happen, which hasn’t gotten a lot of attention, and to be honest if people weren’t diligent about their portfolios then I’m not sure if it ever would have been public info. Essentially, there was a dozen or so loans that were given out to Latvian borrowers, which in all likelihood used either fraudulent data or some other tricks to get through the system.

Obviously, it’s reasonable for Omaraha not to give out exact details which workaround was used to trick the system, but the fact being – in the range of 50 000 euros (+/- 10K) was lost to this one wave of fraud. Due to the way Omaraha’s system works, 80% of that will be absorbed by the recovery fund, and 20% will be lost for the investors. I was one of the people who managed to get lucky and hit quite a few of those loans with my autobidder, so I’ll be taking a loss in the range of 100 euros from this venture.

Now, why this is important other than the fact that it’s of course sad to lose the money; is the fact that this is an inevitable part of investing in to loans. No system is absolutely foolproof, and workarounds will be found. As an investor it’s your job to take that into account when planning your strategy  – the knowledge that at some point such losses may happen. For portals this is always something that would be nice to transparently explain, to provide investors with more confidence in the due diligence they do.

Twino and Mintos, 1 year summary

I accidentally discovered that it’s been about a year since I started investing in the two Latvian P2P portals – Mintos and Twino. While in the beginning, I was mostly testing them out as a potential alternative to the Estonian Bondora, then a year later the situation has changed – I’ve fully exited Bondora on both my private and business portfolios and Mintos and Twino are steadily trucking on as the 3rd and 4th biggest P2P positions, providing steady interest returns with very little hassle.

Good sides:

  • Both Twino and Mintos offer impressive volumes (finishing December with 14mil and 18mil of loans originated, respectively), meaning that for most investors it’s not difficult to employ their money – with reasonable conditions it gets fully invested within an hour.
  • Steady communication and development have positioned them both as relative flagships on the Baltic market, inspiring several other followers (I’ve lost count of the amount of buyback based sites that have popped up recently).
  • Geographical diversity for loan originators provides an easy chance for investors to reduce risk by investing into loan markets other than their own (through OR I’m heavily invested into the Estonian consumer loan market already).
  • Easy-to-use and generally understandable interfaces and reporting systems make keeping track of your investments and changing settings relatively easy (unlike some other sites).
  • By far the most liquid part of my P2P investments, making it easy to cash out rather quickly if in need to reinvest somewhere else (so works as a good place to keep your “cash” position).

Reasons to worry:

  • Quick development also means effort of keeping track of changes – Mintos has gone through a lot of legal changes (relationships between Mintos and originators have changed) and Twino has gone through a full structural reform (with Finabay renamed to Twino and the structure flipped around).
  • Hands-off model also means lack of significant info on the risks of originators and potential losses; this being particularly true for the non-buyback loans which both have started to offer.
  • Sometimes problematic unannounced changes, which have got some deserved negative feedback from investors (mostly unannounced and not well communicated interest changes).
  • Influx of investor money means reduced returns long-term, with interest rates having averaged lower already within the year (while still remaining relatively high).

Overall I’d say I’m quite pleased with both these picks. In my portfolio they are the closest to a near-cash position that I have, and while I don’t focus on actively increasing the positions, then I add in 50-150 euros monthly, keeping them on track of hitting a combined 10K value within the not too distant future.

I’d definitely like to see how they manage with increased investor demand (since the longer the history the higher the trust, but the more money available the lower the interest rates), and hoping to start see some solid numbers on non-buyback loans (rather much like gambling to pick them up now without any significant recovery history to speak of).

Currently in the process of selling all of my Bondora investments

Times have been turbulent for Bondora for a while, and as someone who keeps an eye out for all kinds of changes in P2P investing, even I have managed to lose track of what Bondora is attempting to do. A while back I eliminated my private investing portfolio in Bondora, largely due to tax reasons, but I was still rather optimistic about their long term outlook, which meant that I built a company portfolio that I planned to run with a rather conservative strategy as a part of my p2p portfolio.

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To achieve a conservative portfolio I used an API solution that was self built, and picked loans that were only Estonian, and fell into the more conservative segment, focusing on loans up to C credit group. Within a couple of months I managed to build the portfolio up to about 5000 euros, and while the returns were on the lower end of my portfolio due to the changed risk evaluation policies I was OK with this, as I believed in the long term stability of the portfolio.

Then came all the changes. Firstly the DCA, which, while I understand was necessary was a PR disaster, even though we tried to do our best to help information spread through the investing podcast that we run. The final nail in the coffin, however, is turning out to be the thing that a lot of active investors, including myself, predicted would be the biggest issue – API investments cannot compete against portfolio managers, meaning as long as enough people turn on their autobidders being an active investor is close to impossible.

What this means, is that since the middle of October there has been a steep drop-off for loans, and as such, I have not received a single loan through API bids since October the 13th. Asking around, it seems like other investors are in the same boat as well, leaving only two options available. 1) turning on the automatic portfolio manager or 2) actively trading on the secondary market.

Fundamentally, I do not wish to passively invest in Bondora, which means that if I do turn on the autobidder, it will be just with some play money to test it. I’m just so confused at the direction that Bondora is moving towards – why build all the tools necessary for active investing and then actually make active investing impossible?

Unless the plan was to make API bidding viable for the secondary market only (where it seems to be quite successful). In that case, good luck to all the people making great deals on the secondary market, but I feel the amount of money I currently have in Bondora is not worth the effort of building up the level of statistical modelling which would be required for trading well on the secondary market.

Which means, I’ve slowly started to sell off my company portfolio’s loans, and will continue to do so until I manage to sell most of what I can at value, leaving maybe a small amount of money circulating to see what’s happening. Kind of sad, seeing as Bondora was the portal I started with, and I fundamentally liked their business ideas, but I think my investing ideals have just drifted very far apart from what they’re doing now. Lucky for me, though, there are multiple other viable offers on the market, meaning there is no reason for the money to sit idle!

Average returns in Twino and Mintos

If there is one topic that investors get passionate about, then it’s returns. Looking at the current economic climate, then P2P returns are clearly quite good, but the somewhat downwards trend you can see happening is clearly causing dismay among investors.

Way back when, when I started investing in Bondora, it was completely possible to get 20% returns yearly due to the fact that the market was both new (therefor high risk), and pricing was vague at best (due to lack of precise credit models). However, in the recent few years the industry has clearly evolved to be more mature and less inefficient, bringing to investors loans with buy-back guarantees, which at times might have left beginners the impression that there isn’t much inherent risk left anymore when it comes to investing into P2P (which is clearly not the case).

The two favourites of the recent year or so have clearly been the two Latvian portals – Mintos and Twino, which offered large loan volumes with buy-back guarantees. For a while the interest rates were high enough that many people were a bit confused as to why the rates were that high, and were sure that the rates would be dropping in the near future.

It seems that we are somewhat starting to reach the point where returns will not be as high as they were anymore, and this is of course both good and bad – for investors who enjoy higher risks, the reduced returns are of course bothersome, for more conservative investors the lowered level of risk will of course be more appealing.

Twino

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Twino has already gone through one attempt to reduce the interest rates, which caused significant uproar among investors. They attempted to drop the interest rates to 10%, which caused investors to reduce their investments, which made them increase the rates once more, but they are still not back to the point where they started at (they used to be 12,9% & 14,9%; however now are 10-12% & 13% respectively.)

This means that while it’s still possible to generate >10% returns, then looking at the loan volumes they process the question arises – for how long? Since Twino is closing in on 10 million loans funded per month, then clearly there is enough investor money to go around, meaning when the higher interest loans run out, then the lower interest loans will get funded as well. Once enough get funded regularly, it would be reasonable to expect a drop in the rates.

Interestingly enough, a lot of investors in Twino seems to be super cautious about the longer term loans (24 months), which in my opinion seems a bit unfounded – largely because 1) they are resellable 2) a large amount of them get bought back early, meaning it’s not such a big commitment.

Mintos

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Now, with Mintos, the dynamic for the rates is a bit more complicated since different loan originators balance the interest rates between what they themselves believe to be fair and what the other originators are offering. This so far has caused a sort of a hierarchy to form between the different originators, meaning some loans disappear from the market very quickly (or get marked full by autobidders) while some remain “waiting” on the primary market.

While there have been fluctuations here and there between the interest rates offered, then it’s clear to see that the amount of loans with a buyback guarantee has been slowly but surely decreasing, meaning that investors are forced to do some more in depth analysis to figure out whether or not they should include lower rate buy-back loans or higher rate ordinary loans, which is rather complicated to do due to the lack of public information about the loan books of the originators.

Future of returns

Twino and Mintos do not exist in a vacuum – the amount of investor money available is dependent on the amount of projects listed on alternative sites and the returns offered there. However, if you look at the average returns offered by other portals, then >12% returns will be more and more unlikely as time goes on.

Just looking at the Estonian portals available, then Estateguru historical returns are <11%, for Bondora they have said they wish to hit 10% returns, for Investly the returns are <9%. Higher returns are offered by P2P portals which include more risk or a more complex model (Crowdestate for example inherently has much more risk, Omaraha’s premium for returns makes sense if you consider the fact that they have no proper exit mechanism available and the learning curve is rather steep).

It’s of course difficult to make predictions about the future, and how the markets behave, but I do believe that we are likely to be hitting the downwards slope of returns, which will in the long run bring us closer together to US/UK/Central European returns for P2P portals.

On the one hand this means a bigger faith by investors (investing their money at a lower rate), and a reduced risk rate (due to growth of the whole sector), on the other hand this will signify lower returns, and higher efficiency on the markets, meaning the >20% returns several investors have achieved are likely to be in the past. As someone who does believe that the effort/risk vs returns have been off balance so far, the returns lowering a bit is not an unexpected development.