A series of mishaps means it’s now time to dispose of this peer-to-peer trust
IN FEBRUARY Questor tipped a rather unusual trust as a “speculative” buy. Naturally we have kept a close eye on it since then and have now decided that it’s time to sell.
The trust is P2P Global Investments, which invests not in shares but in a type of loan originated through the relatively new medium of “peer-to-peer” lending platforms. These online marketplaces allow investors to lend directly to individual borrowers or businesses; the advantage over conventional banks is that costs are dramatically lower, allowing both parties, in theory at least, to benefit from better rates.
P2P Global Investments used the money it raised in its flotation in 2014 to invest in a wide variety of these loans from peer-to-peer platforms around the world.
The trust’s aim when it floated was to generate a growing stream of dividends at between 6pc and 8pc of the initial share price. Initially investors liked the idea and within a few months the shares were trading at a premium of almost 20pc. This was followed, however, by a sharp reversal that saw a discount of almost 30pc open up at one stage.
It was the significant discount, 21pc at the time, that prompted our tip at 782p earlier this year. But since then there have been developments that make us uneasy about the holding. First is simply a further narrowing of the discount to about 17pc, which automatically reduces the trust’s attractiveness to some extent.
On top of that there are signs from elsewhere in the peer-to-peer sector that returns are getting harder to find.
Last year, Zopa, the British pioneer of the movement, said it had stopped taking money from new investors and warned of a shortage of good-quality borrowers. The result is lower interest rates and higher default rates.
Across P2P Global’s own portfolio, impairments from bad loans were £27.7m in the first six months of this year, according to a research note from Canaccord Genuity, the stockbroker. This equated to an annualised 5.9pc of the loan book, compared with 4.4pc in the same period of 2016 – a significant increase.
New accounting rules relating to loan impairments “will result in a larger one-off adjustment during the early periods of adoption”, the trust has warned.
Next is the fact that this newly floated trust has already had to conduct a strategic review. As a result, the original management company will merge with a rival firm, which will run the portfolio. The mix of assets will be changed with the intention of improving the trade-off between risk and reward, although the process is expected to take up to 18 months.
Finally, the trust is fairly expensive. The annual “ongoing” charge is 1.21pc, or 1.33pc once the performance fee is taken into account – not insubstantial relative to the target yield. The performance fee amounted to £1.5m in the first half of this year, despite mediocre returns for shareholders, although the criteria for its award are to be tightened. “Given returns since the flotation, we would have liked to see [this change] backdated to January 2017,” Canaccord said.
It added: “Having previously expressed concern over a generous fee structure, we have been encouraged by a more shareholder-friendly approach. However, there remains room for improvement.”
The broker concluded: “We expect returns to remain below the 6pc-8pc target as the portfolio is rebalanced, a process which should be completed by the end of 2018. Investors are now being asked to ‘look across the valley’ as [peer-to-peer trusts] take action to recover from poor allocation of initial flotation proceeds.
“The company is now heading in the right direction, but in this case we believe it will be better to arrive than to travel. In the meantime, we believe the returns do not justify the risk. Given current impairments in a relatively benign environment, our fundamental concern remains around what happens when we reach the next stage of the cycle – and recent comments from Zopa on increased competition from banks and credit conditions provide little comfort. We downgrade to ‘sell’.”
Stockbrokers are the first to admit that “sell” recommendations are relatively rare, so when they do occur it is worth taking note. We share Canaccord’s misgivings and advise readers to dispose of their holdings, banking a modest 4.6pc gain since our original tip. Questor says: sell Ticker: P2P Share price at close: 819p