A se­ries of mishaps means it’s now time to dis­pose of this peer-to-peer trust

The Daily Telegraph - Business - - Business -

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

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