My Bondora portfolio, 3 years

Time flies when you’re having fun, huh? My Bondora portfolio is now three years old, so I thought I’d take a quick look back and see what’s been happening and share a bit about my future plans when it comes to my private portfolio in Bondora.

Some quick stats to get started:

Total money invested: 5000€

Total interest earned: 2031€ (as of 30.12.15)

Current portfolio: 80% Estonian loans

Loans by rating: see below

3012loanstotal

So, the good, the bad and the ugly. Overall I am happy with how my Bondora portfolio has performed. I also took some time to calculate my returns, and this is the current standing for my own calculations for returns:

Option 1 (Super pessimistic)

xirr301215

Option 2 (Less pessimistic)

xirrv2

The pessimistic scenario looks rather pessimistic indeed, but don’t get stuck on those numbers. This is because it assumes no recovery for loans, but I can actually see recovery happening, so no need to panic. Overall in the long run the returns will be somewhere in the 12% range, it has balanced out more and more  as time has gone on.

3012rec

Future plans

I have completely stopped adding money into my private portfolio, and once new year starts I will start actually taking out money. There are several reasons for this. 1) I am building a second Bondora portfolio for my business account (going well so far, have given out my first 100 loans), 2) The tax hit is just getting too big (before, it balanced out with my mortgage tax return, but this year I’m actually paying additional tax), 3) Benefits of investing as a business – both in terms of accepting defaulted loans and postponing tax obligations.

So, as of today, I have set my bids to AA & A Estonian loans, however many there may be, and hope to transfer out the 5000 euros that I invested in the next two years. This money will be directed into stock investments, mostly into buying into index funds regularly, since stocks are the most reasonable investment for a private person in Estonia. I predict that my private portfolio will remain in the range of 3000€, and I’ll keep it slowly spinning to track how it does.

New portfolio manager Q&A with Pärtel Tomberg

The new portfolio manager for Bondora was released, so of course emotions as usual are running high. My first thought was – holy sh** – this can’t be how the new PM works – you just have to go through two confirmation screens and essentially pick one option out of three to start investing. So, after my initial reaction I had a chance to get some answers from the CEO Pärtel Tomberg about the reasons why the new system ended up as it did. (You can read their official pre-release post here.)

The answers by are by Pärtel (unedited) and my comments are in italics. (Before we start, I gotta say the answers I got from Pärtel were impressively detailed, and a much better show of communication then anything I’ve seen in the past couple of years. Some of the ideas I don’t agree with but he does show their mindset quite well.)

Screen Shot 2015-10-23 at 13.48.41

1. What was the design logic for having more simplicity? Don’t most investors want to more actively manage their investments? 

a.       Our main goal is to deliver net returns higher than available on the public stock markets regardless if you manage your portfolio actively or passively. We want to deliver the results regardless if you are investing 1,000 euros or 1,000,000 euros.

b.      Approximately 80% of the investments are coming from investors who only have used automated portfolios (passive investing) and 20% from investors who are actively managing their portfolios (loan picking, secondary markets, custom strategies on old Portfolio Manager etc.). We conducted extensive interviews and surveys in the beginning of the year and found out that the passive customers actually considered our product (Portfolio Manager) very complex and wanted a single control centre along with easy overview on top of getting access to Bondora’s returns. Active investors on the other hand wanted very granular reporting and loan picking options. It became evident that trying supporting both within Bondora website would be impossible as neither group’s needs would be satisfied.

(I have heard this complaint as well that the current PM as-is was difficult to use, and helped several people set their PM up.)

c.       Therefore we made a decision to build a super easy and light weight product for the retail investors and create an API to support the more active, trader types. We will now release an API that is open to third parties to build services on top of our platform (e.g.http://www.lendtower.com/, https://beeplus.me/). The second version of this API (version 1.0 is in our sandbox) will be coming early November and will include Primary Market buying, Secondary Market buying, Secondary Market selling and setup to support third party developers. Later this year we will also roll out full reporting package after we have updated and corrected the reporting package on the web.

(So far we haven’t gotten much info on the API and the things third parties are doing with it. I had two developers mark that at this point the API wasn’t as good as it could be, but hopefully Bondora is accepting recommendations from the people working on developing the interactions for API.

Also… corrected the reporting package on the web? I’ll believe it when I see it 😉 )

2. Why did you decide to change the way account value was shown ? (meaning the 60+ loans being counted only as the unpaid-by-this-moment as opposed to the whole value of 60+ with maybe a combination of expected % of recovery?)

a.       The objective of the dashboard is to give investors an immediate view of the profit of their portfolio. This profit is calculated using the net investments made by the investor to date (deposits less withdrawals) and the value of their portfolio.

b.      Investments into loan portfolios are fixed income investments whereby an investor exchanges a certain amount of capital for a steady stream of monthly payments that are higher than the initial investment. The key here is the monthly payments. Part of this return comes from interest and part of this comes from reinvestments interest that in turn generates both new principal payments and interest – e.g. cumulative interest.

c.       All loans are priced on the assumption that a certain proportion of loans are not repaid. The default and corresponding recovery is factored into the interest rate so that interest payments on performing loans are high enough so the total portfolio delivers the expected return.

d.      As interest and reinvestments of repaid principal are made monthly then all provisions are matched to the same period. Otherwise we would compare lifetime losses of a portfolio with the interest income of a a couple of months. This logic would potentially work only with a very short investment focus but as investing on Bondora is a long-term investment then it does not make sense.

e.       There are two financially sound alternative views to calculating the portfolio value the way we do in the new dashboard. First is based on IFRS rules for banks and the second based on repricing of all loans in the portfolio according to a similar logic we use for pricing new loans. We plan to roll out both methodologies by the end of the year so that in the future investors can choose which context fits their requirements.

f.       In case you disagree with our logic and would want a simple alternative to check the net annualized return than simply compare the interest income of your portfolio with the amount of capital you have invested on Bondora (deposits – withdrawals) for a certain period. This would be ROCE logic (http://www.investopedia.com/terms/r/roce.asp).

g.      PS! Discounting the balance of overdue loans and matching this number with income makes sense for mortgage and super-prime loans (e.g. ZOPA) where the income of the performing portfolio is negligible so a loss can effectively never be priced/repaid by income on the portfolio.

(I think this is a tricky issue – overall for new investors seeing a more balanced view, but long term this becomes a bit problematic because the number of what’s shown on the dashboard vs what’s shown in the pie chart will differ by a magnitude of 10x.)

3. How should the passive investor decide between the three risk classes? (What should be the ‘decision tree’ that leads them to a specific type of investment?)

a.       First of all an investor should decide if and how much of their portfolio they would like to invest on Bondora. Passive investors typically invest between 5%-10% of their portfolio on Bondora and are not that much concerned of additional diversification (as they have already diversified by only allocating 5-10% to Bondora).

b.      The three risk-return options allow you to decide if you want to build a portfolio that is on average less profitable (and risky), more profitable or at average profitability.  

c.       Each of these options comes with different expected returns however the actual risk of the portfolio (losing money on a portfolio vs. the gains) is always determined by the diversification level. Our statistics has shown that after 200 investments the volatility of returns stabilizes based on if you took the less or more risky route. However in most cases investors earn considerably more than anywhere else on the market and almost never lose money (enclosed).

d.      In summary, investors should first decide if they want to by the types of unsecured personal loans that Bondora can deliver and how much they want to invest. If this amount is enough to diversify (we think that you should consider building up a total portfolio of at least 1,000 euro to meet this condition) then thereafter the actual risk of your portfolio is not influenced anymore by the types of loans you pick.

(Once again… the decision making is slightly problematic. When I try to think about which of the three options I should choose, I would probably struggle. Long term valuations of high risk – high reward can be hard to project the value into the present.)

4. Do you feel that the current one-window check screen for the investor to verify their understanding of risk is sufficient to guarantee that investors are adequately analysing the risks associated with investing? (How are less knowledgeable investors protected from making bad investment decisions?)

a.      In order to invest on Bondora the investor needs to review the information on our landing pages that based on FCA guidelines include full information about risks and processes. You should be confident that you want to invest through Bondora when you sign up and you should only invest a certain share of your portfolio. Typically our customers invest 5-10% of their capital with Bondora and they consider this part of their alternative investments portfolio (potentially higher return but less liquid/higher risk).

b.      The Portfolio Manager page includes information on the expected returns (that are net of losses), an overview of how the portfolio is expected to grow, the expected composition of your portfolio (by risk level and country), expected numbers based on levels of diversification as well as detailed explanations of how different numbers are calculated.

c.       We believe all these steps and detailed information is sufficient to make an investment decision on a 5-10% proportion of an investors portfolio. This level of detail is considerably more extensive than you would find with the people selling pension funds (in supermarkets), online FX sites or online asset managers. We also think our information is considerably more detailed than any other marketplace lender.

(The last in particular is an interesting statement, that your P2P portfolio should be 5-10%. While most bloggers try to direct most investors into this direction, then not many starter investors follow this – for many the P2P section of their portfolio is anything from 50-100%.)

5.  How does the risk balancing process work? How far “out of balance” will the portfolio tip before you stop investing into a group to wait for others to rebalance?

a.       The system calculates your portfolios risk level after each batch of investment and only buys batches of loans with a risk level lower or higher than your existing portfolio depending on your strategy. In general customers who have signed up for the new portfolio manager are looking to decrease the risk of their portfolio.

(This would definitely be interesting to see. If this algorithm works well, then whoever designed it definitely deserves a raise. Also, when the previous PM was launched in January I also set it to be more conservative than my existing portfolio, so I guess I fall in to that ‘general’ subset of investors.)

6. The sizes of the loan pieces – take the sample of my portfolio, what would the investment per loan be (and why isn’t this visualised anywhere?)

a.       The size of each investment is determined by the number of borrowers in your portfolio. The investment size is doubled after each 200 investments (the file enclosed earlier explains the logic). Your (as in me, Kristi’s) portfolio has 680 borrowers which means that your bid size will be 40 euro (or 0.72% of your outstanding portfolio). This level delivers an optimal investment time as well as risk diversification.

b.      This number is not visualized as the people we interviewed when developing this product never raised the topic. We are happy to add this in case our customers request it. Most people never think of how much they would invest into granular assets within the category they are investing in. For example if you choose a pension fund you never think or decide on how many euro per month is invested for each stock or bond in the portfolio.

(Yes, please visualise this :) )

c.       If everyone would sign up to the new product the roughly 83% of the investors would be at 5 euro investment size however this number is more equally spread when we look at the amount invested.

Screen Shot 2015-10-23 at 23.23.50

(Alright, so now this is probably the most controversial of all the issues. My current portfolio value as you see above is about 6,5K. This means that at the rate I invest, which is about 150 euros per month, with returned money reinvested I will be investing into a total of…. 6-8 loans per month. I’m not entirely sure how I feel about that, especially since I’m on track to get to the 80 euro pieces quite soon. On the other hand, I was super surprised at the data that so many of the investors are at such small portfolio sizes that they would remain at the 5 euro piece – this means that they have <200 loan pieces, meaning a portfolio of <1000 euros. The data shows an intriguing look into the investor base of Bondora – a lot of retail investors who invest small sums, and a small % of investors with significant portfolios that make up almost a third of the money invested. This is the part where you have to keep in mind though – the people complaining on the forums are those who are a very vocal minority – the majority just sits still and lets their money get invested without causing a hassle on the forums.)

7.  Will the 80 euros per limit also apply when investing via API? Why was the decision made to lower the investment amount per loan? How many portfolios are likely to be investing at the max level of 80 euros per loan? (Also, if your account has less money than the assigned ‘loan piece size’ then will it still invest or wait for the money to stack up aka the problem of ‘cash drag’?)

a.       The 80 euro per loan limit was set to ensure that the proportion of each new loan in the portfolio is not higher than 1% of the deployed balance in most cases for customers converting from old products to the new. Such restrictions do not apply when investing over the API – you may fund the entire loan if you want through that channel. As the data showed earlier – roughly 2.6% of investors would be investing at that level in case everyone would convert to the new product.

b.      The new Portfolio Manager never invests fractional amounts to ensure the diversification rules are properly applied. This is already the case for most investors as the minimum investment amount is set already to 5 euro.

(I essentially read this as – the people who would use the API or those who would be investing the max 80 euros per loan piece are likely to overlap anyways so this is somewhat of a non issue.)

8. Does account value function imply that at one point selling whole portfolios will be possible? (Since 60+ loans are now sellable on the secondary market already.)

a.      The new Portfolio Manager will in the future include the option to sell part of or entire portfolio. Other investors using the Portfolio Manager will then pick these up in case there are not enough loans on the primary market.

b.      We are currently working on building the models to price outstanding loans so that loans on the secondary market would be priced according to the same logic as on the primary market. In essence this would mean that certain loans would be sold at balance value, some above and some below.

9.      How many investors are you predicting will be using the passive web interface vs how many will be holing out to use the API?

a.      We expect that roughly 80% of investors will use the passive web interface and rest will come through the API. Already after two days the new Portfolio Manager accounts for 45% of the new investments without any marketing.

(I think this % is very high – it’s a bit scary to seen that many people be so passive with their investments, but overall, Bondora is just about as passive for them as an average investment fund now, so maybe they shouldn’t be judged that strongly based on that. I’m tempted to try the new PM myself as well, just until the API is live since it will take time to test most third party apps for that as well.)

10.  Many of these changes are likely a precursor to more institutional investors coming on board – are you running any scenarios to assess the likely future balance between retail & institutional investors?

a.       We are building a structure where institutional and retail capital is collectively combined to allow consumers move away from banks. It is certain that institutional capital is going to be higher than ’self-directed’ retail capital as the markets are at very different sizes. However you should also understand that raising money from banks (who hold your deposits), pension funds (who manager your retirement plan) or insurance companies (who manage the funds to keep your home safe) are all retail investors simply packaged together.

(While this is already long then some final comments –  1. I do think that most people underestimate just how passive investors are, and a lot of our first impressions are strongly coloured by bad decisions made in the past by Bondora. While talking to Pärtel then he also mentioned that some reorganising is happening to manage investor relationships better. Though they have done this before, then I hope they do it better this time to generate answers for the more complex questions that investors are likely to ask. 2. If you feel like the new PM isn’t for you, then I recommend against activating it – but as you see from the data above most people are likely to activate and just be silent about it. 3. I reserve the right to guess more about these things once they’e been live for long and we can see a bigger impact of this on the way the market works.)

To finish up, a XIRR chart, kindly shared by Pärtel, to demonstrate the need for diversification:

Screen Shot 2015-10-23 at 23.59.48

My Bondora portfolio (2015, September)

September wasn’t a very active month for me in Bondora. Due to having extra expenses (plane tickets!), then I only added ~20€ into Bondora this month. I’m on the wait to see what Bondora will announce for the new market system before adding in more money, since I’m 80% decided on starting a second Bondora portfolio under a business account. That still depends on what Bondora is set to do with their investments.

septemberinvestments

As you can see, a sad moment has arrived – the 60+ overdue has finally hit 1000€. I’ll be honest, it hurts a bit to look at 😉 . Especially, knowing the upcoming changes for how overdue loans will be handled. Still, I’m currently enjoying some digging around the dataset so I’ll be taking a longer look into defaults and recovery soon.

septemberinterestearned

The ‘bump’ of adding in some more money at the end of summer hit, making September a record month – total interest earned was 104,7€. Hitting 120€ by the end of the year from just Bondora is looking very unlikely, but I’m not too bothered by it since I’ve just added a bit of money into Estateguru, so that compensates for overall social lending.

septembertotalinvestments

As I said, not much money was added, so there is a bit of a drop-off. However, you can clearly see the impact of the new rating system by how the defaults are dropping off a bit. It of course hurts seeing 25€ pieces default, but I don’t track them too much.

septemberrecovery

Recovery is still going nice and slow. I’ll look into that a bit more soon, so I won’t go into more detail now. Overall, looking forward to new announcements! (Likely that they will happen after the Lendit conference though, so still a while to wait.)

My Bondora portfolio (2015, August)

Fascinating times seem to be waiting ahead in Bondora, but so far I’ve decided not to react much. Overall I’ve reduced the monthly amounts I invest into Bondora a bit (from 200-ish down to ~100€), and it’s already showing its impact in terms of the ratio of defaulted loans in my portfolio.

augustinvestments

Due to the fact that I’ve reduced new funds, then the % of overdue and 60+ overdue loans has started to grow quite a bit. Most days the ‘current’ floats at about 70%, and it’s slowly losing ground to problematic loans. Not sure if that’s signs of a recession yet, or just the rebalancing, but soon my 60+ defaulted loans will reach 1000€, which is undoubtedly a bit painful to look at!

augustinterestearned

While I’ve been getting a bit of recovery here and there in the form in principal payments, then interest earned has kinda stumbled to a stop. This month it didn’t manage to pass the 100€ marker, remaining at 99,09€. Hopefully next month I’ll be back over 100€, but any growth seems problematic due to the constant influx of defaults.

augusttotalinvestments

As you can see, then looking at the older months of investments, then the green in some of them will start to lose out to the red of defaulted loans. Since my first investments are now more than 2,5 years old, then it’s time to start drawing some conclusions, since just a while back Q1 of 2013 has hit break-even. (Meaning interest earned > outstanding principal.)

augustrecovery

Recovery wise it was an OK month. While the chart shows +1 loan fully recovered (Stage 5), then at the end of the month another loan was fully recovered and is probably waiting to be manually market into the 5th stage.

0109xirr

Since the numbers might seem somewhat pessimistic, then just to show that the case isn’t that bad, I updated my returns calculations, and while the pessimistic rate of return looks, well, pessimistic, then overall the numbers are fine. Also, since long term returns are slowly dropping, then a moderate 13-14% is perfectly fine as a long term return.

Overall I’m looking forward to what exactly Bondora is planning to do with all their new changes. Until then I’ll keep my strategy of slightly smaller monthly contributions and then maybe readjust depending on what’s the final product that they’re going to serve to investors.

The new Crowdestate project shows how spoiled investors are

This week, the Estonian real estate crowd funding site, Crowdestate listed a new terraced houses project, which differs from other projects in many ways. First being that the hope is to run the whole project without a bank loan, giving CE more freedom then usual since you’re not pressured by the bank to sell the project to pay back the loan. Secondly, the predicted returns are lower than other projects so far, and investors are behaving somewhat strangely.

cenewproject

The sum needed for the project is about 500K€, which is a bit more than usual, but nothing that the investors can’t put together. What is strange however, is that the project hasn’t filled up yet when most others filled up in a matter of hours. Looking at the discussions I’ve seen in many forums, then the main reason for that being the opinion that 10-12% predicted net return is “too low”.

Let me repeat that, many people aren’t choosing not to invest not because of risks associated or the fact that they don’t like the project (most people don’t do too much due diligence on the projects anyway), the main reason is that 10% interest earned on a passive real estate investment isn’t high enough to bother.

Expected returns?

Most people are going to have their bubble burst in a painful manner at some point. Due to social lending and crowdfunding becoming more popular and successes of some projects, private investors have ended up with a completely unrealistic expectation of how much money investments should make. To put it into perspective, when it comes to mostly passive investments:

12% return – Very good and optimistic in the long run

5% return – Pretty good, beats inflation

0% return – Yay! You aren’t losing money

Overall, I’d say if the project doesn’t fill up it would create an interesting precedent – people have a lot of money available but they’re not willing to invest it for an expected 10% return. This opens several possible options – 1) people who have money will be able to pick up good stable projects more easily, 2) investors hoping for super good returns will forever be stuck in analysis paralysis and wait for the “best” deal, 3) market will have to rebalance in terms of the scale of projects due to people being unwilling to lock down money, 4) it might turn out that CE has completely missed something in the risk valuation of this project. It will be interesting either way!