How does the new Bondora Portfolio Manager work?

The new Bondora portfolio manager which was launched just a few weeks ago, has managed to cause quite a bit of panic among investors due to the lack of information on the inner logic of the manager. I contacted Pärtel, the CEO of Bondora, to get some clarification on whether I understood the portfolio manager correctly and this is a short overview of what you should take into account when setting up your manager.


Portfolio manager launch

I cannot leave this unmentioned, the launch was one again, expectedly troublesome.

1. The launch of the manager was late by a week. (None of the investors were surprised. This is not a good thing, once someone loses the capacity to be disappointed in you, it shows that they have stopped caring, not something you want from your clients.)

2. The manager was buggy at launch. (The numbers didn’t add up to 100%, the promised visuals weren’t there, and the manager did strange things for some people.)

3. The manager was not launched with enough information. (You could see this by the discussion that erupted in forums and on Facebook, people trying to figure out what to do with the new manager and what the new settings meant.)

Overall, I applaud the attempt at simplicity, but the launch could have gone much smoother, and a lot more communication is needed to make the manager appeal to more people. Several investors have turned theirs off since they don’t trust the manager to make decisions for them, since they won’t know how the manager makes the decisions.

The logic behind the portfolio manager

I’ll go over some of the basic ideas on how the manager works and add some theoretical/sample situations for you to consider.

1. The portfolio manager does NOT take into account previous investments

Pärtel confirmed this as well, stating that the manager’s main goal is to work for future investments and for this reason past portfolio setup is not taken into account. You can still see your portfolio division though, to make decisions based on that.

This means that if you, for example, like me, have 20% of your loans in HR loans, then the ideal way to reduce their part in your portfolio is to not have any more loans added into this category for a while, or keep the percentage assigned low enough that it wouldn’t keep growing (sub 5% probably).

2. The portfolio manager STOPS after the assigned %/number is filled

This was confirmed as well by Pärtel. If you assign your portfolio size to 1000€, then after it has invested that amount the manager stops. This also works, if you for example set 15% of investments into C group then after it has filled 150€ in loans, that credit group stops getting any loans.

The biggest point here being, right now it’s impossible to see how much of any segment has been filled up. Pärtel said that in the next few weeks there will be indicators to show you how much of the manager’s original settings have been filled up and how much have been filled up by segment. This should give you a chance to estimate how successful your managers are.

3. Editing the manager means a hard RESET

If you have set up your portfolio to invest 15% into C loans for example but feel like you want to edit it to 20%, then this means a reset for the manager, and essentially it will start counting the loans again from zero. This means any edits cause previous portfolio manager progress to disappear.

Pärtel said that there would be better indicators here for people to realise that editing the manager essentially causes a reset of the goals. This means that in the long run, the manager should be something you set to run and forget, since otherwise it keeps trying to start over.

4. The new manager focuses on getting money out ASAP

With the old system, since you couldn’t get loans to go out particularly quickly, you could have money sitting around on your account for days without moving. Since the new manager sets to fill out any goal you’ve given it, that means money moves much quicker as long as any loan is available that sets your criteria.

For example, if you set your portfolio to invest 90% into A and 10% into B rating, then the manager invests into either group, no matter how much of the goal has been fulfilled, meaning it could invest 90% into A as long as those loans are available and not wait around for B or keep some amount reserved for it. When 90% A is filled, then it just sits and waits for B group loans.

5. The queue system still works, kind of

With the old system there was a strict queue for getting loans. Everyone was in a long long line for all types of loans and that set the pace for your portfolio. I asked this from Pärtel as well, whether the queue system still works and the answer was somewhat vague. Essentially he said, that the system tries to guarantee investors equal chances at different types of loans, I’m not sure how to take that answer.

In terms of fishing for best loans though, this means that while setting your manager to get AA group loans means that you only get AA group loans, doesn’t mean that you get more AA group loans than other investors who have included that group in their manager.

Overall use of the new manager

I’m looking forward to both more visuals, more overall information, more experience from other investors and the hinted indicators that help you keep track of what your portfolio is doing. I’ve personally set a quite conservative selection into my portfolio as you can see from the projected lower returns and I liberally hand-pick loans to add into my portfolio. For this month about half the loans I’ve picked have probably been manually, I mostly add HR loans manually. The new manager takes some practice, but once the fundamental logic becomes more clear, I hope for overall efficient use.

What you can do with it:

– Set and forget, which is ideal of super passive investors

– Force a bigger amount of money into a credit group when you want

– Get more investments our quicker than before

What you cannot do with it:

– No fine tuning your portfolio based on x criteria

– Be able to keep some money in reserve for “good” loans as you could before


Impact of the new Bondora Rating system

As of last night, Bondora took the first step to push the new credit system live. As of now you can see the old scoring (ABC600-100) alongside the new scoring system (AA A B C D E F HR) on the market. Leaving aside the fact that the update broke a significant part of the functions accidentally and removed some on purpose, how does the new scoring system impact investors?


Tauri’s visualization of the link between credit groups and risk

Automatic vs manual investing

For those investors who have always invested automatically using portfolio managers very little will change. If you ran a very conservative strategy, which is likely if you have a small portfolio, you can just accept any general portfolio manager setup that Bondora offers you and you’ll be set. Investing will be just as passive as before, and you’ll end up being safer from risk than you are now.

For those like me who do a part of their investing manually and run portfolio managers that are a bit more high risk than the default ones, more is going to change. Firstly, the returns for active investors will likely drop because more market inefficiencies will be eliminated. Secondly, investing will likely become more passive due to less need to scan through data provided because the new system works on partially hidden data, which means that any analysis you are running will be insufficient. Thirdly, there is definitely a lot of potential that once the new scoring is finished, that our portfolios might prove to have some very dangerous combinations of loans, such as a huge portion of HR loans.

Different process of analysis

Due to a lot of data being hidden, then it will be up to the investors to trust Bondora to rate the loans well. For example, if you look at the top 3 Estonian loans listed by potential returns onthe market right now, this is what you see:

12.73 return – HR (A600 unverified – 38%)

9.87 return – B (A1000 verified – 15%)

9.3 return – C (A1000 verified – 15%)

Now, if you look at the 3 worst Estonian loans listed by potential returns on the market right now you see something equally confusing:

0.43 return – HR (A700 income verified – 34%)

1.44 return – HR (A600 unverified – 38%)

3.56 return – D (A1000 verified – 15%)

When looking at such comparisons, it’s clear to see why you need to be able to trust the sytem Bondora made. Just looking at the potential interest or credit group is not enough to be able to predict the risk group a loan falls under. Looking at an ordinary A1000 loan, the different risk factors that Bondora takes into account can make it fall under B, C or D rating while the interest and income is the same, but potential returns for those examples differ by a magnitude of 3 times. Same for the two A600 loans – they are both the top and bottom performers listed on the market currently.

Long term impact

– Social lending will likely become more more passive (at least for me personally)

Returns will even out for investors (since the rating system should be more transparent)

Other than that, it’s difficult to predict that might happen. The new portfolio manager hasn’t been rolled out yet, so we don’t know exactly how much freedom we have when setting it up (such as, whether you can limit your investments by potential return or just by credit group or by whatever combination of other data.) Whichever way it goes, the new year will start with a lot of portfolio managers being created.