Peer to Peer Diversification?

I was drawn to peer to peer (P2P) investing as it seemed to be a good way to get some regular fixed income. Ultra low interest rates in savings accounts provided by banks or building societies just weren’t worth looking at and while a lot of people are busy churning premium current accounts, it’s not something I really fancy doing.

As mentioned recently, I’ve been happily investing in P2P for a year now. I haven’t added any new funds into P2P since my initial investments, just been reinvesting the capital repayments and interest as they get paid.

I came across this post by 7 Circles about building a P2P portfolio a couple of months back – splitting your cash across more established platforms but also investing in smaller, newer (and perhaps riskier) platforms, much in the same way you would diversify a fund or share portfolio. I had already spread my risk across three different platforms but hadn’t thought beyond that, probably because I didn’t know of many other P2P platforms other than the ones I was already invested in.  The post mentioned several P2P platforms I’d never heard of before, so I spent some time checking them out. While doing my own research, I came across many other P2P platforms – it certainly is a rapidly expanding way to invest!
I eventually decided to add FundingKnight and Landbay to my P2P stable.

What made me choose these two?
Funding Knight loans out to businesses but some of these are renewable energy businesses, which I hadn’t come across with Funding Circle. Risky yes, especially in light of cuts in government subsidy but I’m only investing a small amount here and well, if subsidies are being cut, hopefully I am providing some much needed financial help for these sorts of companies.

A tick in the box for some ethical investing on my part anyway. My average interest rate here is 8.4%.

Landbay‘s loans are on buy-to-let mortgages, so the loans are secured against property. The rates on offer aren’t as high as some of the other platforms (only around 4.4%), yet this offers some different exposure and diversification in the P2P realm for me, Again, quite risky given the recent unfavourable proposed tax changes to BTL but I’m only investing small amounts here. Their website is simple, no frills, no nonsense. All loans are for a minimum of 3 years, which suits my long term investing plan.

According to some, a tick in the box for some ‘unethical’ investing!

Funding Knight is similar to Funding Circle in that you can choose who you want to lend to, read about the businesses, check out basic financials, get a bit more involved etc.

Of the two, Funding Knight doesn’t charge lender fees, whereas Landbay charges 0.50% – 1.00%.

Allocation

I’m going to try to aim for the following allocation ultimately:

Funding Circle 30%
RateSetter 25%
Lending Works 20%
Landbay 15%
FundingKnight 10%

That’s a 75/25 split, namely:

  • 75% in the more established and ‘safer’ Funding Circle, RateSetter and Lending Works
  • 25% in smaller and newer platforms, Landbay and FundingKnight.
As stated earlier, I’m not changing my P2P investment strategy for the remainder of the year – the funds used for the above two new platforms have come from repayments from the other platforms (and also referral fees).  Currently, I’m overweight in Funding Circle and RateSetter so I’ll be shifting some more repayments around.

I think I will review my strategy next year as I currently don’t factor in income from P2P into my plans.

A quick calculation shows that I’m currently receiving just over £10 a month in P2P interest (about 5.6%) so I will aim to increase this gradually by reinvesting and (from next year) a little more funding. The bulk of my money was lending at around 4.5% when I started – subsequent loans have been for a lot higher so the average should go up in time.

I’ve always lumped P2P in with the equity side of my investment portfolio. I don’t feel that it’s quite as safe as cash in the bank or premium bonds. While in the UK, P2P is governed by the FCA (Financial Conduct Authority), it’s not covered by the FSCS (Financials Services Compensation Scheme), so there’s a greater element of risk.

However, not everyone feels this way about P2P – RIT acknowledges that P2P has a higher risk profile but doesn’t believe that it’s quite in the same ‘risk league as equity so he lumps his P2P in with his cash.

Maybe when I’ve got a couple more years under my belt, I may share a similar view, but regardless, P2P is still likely to only provide a small bit of diversification to my overall investment portfolio.

[NB – This post is not my recommendation to invest in any of the companies mentioned – I have invested in these companies personally. I also haven’t included any personal referral links. FundingKnight doesn’t have a referral scheme but if anyone wants a referral for Funding Circle, RateSetter, Landbay or Lending Works, please drop me a note and of course, do your own research!]

14 thoughts on “Peer to Peer Diversification?

  1. I think it's really sensible to diversify your money amongst p2p lenders. As you know, I've been doing p2p since 2006 and have thus seen the industry change (grow rapidly) quite a lot since then. I always like to look at the P2P Finance Association on a regular basis, to see if they have any new members. This is not to say that they are going to be way safer than any of the newby companies. but I do like the ethics and process of it all.

    http://p2pfa.info/p2pfa-members – Funding Knight isn't on there but your others are. Rebuilding Society isn't on there either, which is one I got a free £20 for (and never added any other money to!).

    Cheers

  2. P2P lending is something I will be looking at as part of my asset allocation in the (hopefully) not too distant future. Good to know there are "ethical" options out there – I'm quite keen on green & renewable investment (long term I think it has to be the way we go unless we fancy being wealthy in an apocalyptic environment – would take the fun out of it somewhat!)

    Like you say I think probably a good idea to spread any investments in this around a bit – pretty sure there'll be an eventual cull/consolidation of this marketplace.

    Mike S

  3. Hi Mike
    Yes, I'd like to invest more in ethical options, if only to balance out some of my investments in sin stocks! As you say, clean/renewable energy has to be the way ultimately.

    Many people are looking at P2P because of low savings interest rates in banks but perhaps this may slow down as interest rates go up?

    Thanks for stopping by!

  4. Hey M
    I can't believe I'd never heard of P2P until I started reading PF blogs – or perhaps I saw the reference but wasn't interested in reading any more about it

    Yes, I had a look at the P2P Finance Association – I was going to go for Thin Cats so all would be members, but didn't want to make a large initial investment of £1k at this time. Next, I had to decided between Funding Knight and Rebuilding Society and I decided to go for the former, because of the renewable businesses I could lend to.

    I could end up investing in others in the future – we'll see!

  5. I chose Zopa, who lend to people who have difficulty getting credit, or who just want to borrow from someone other than the banks. I haven't put much in, I just wanted to encourage an alternative to the big banks. I'm not sure how it's doing, but it's better than a savings account and I don't intend to take the money out soon (I'm not too sure how easy it will be to withdraw your funds).

  6. If a house is purchased without debt and rented out, it is not buy to let and that cannot be considered unethical because the full amount of money was used to buy.

    If a house was purchased with high levels of credit that normal people cannot obtain, that is unethical.

    It is not the providing of a home that makes it unethical, it is the tax treatment and implications of driving prices higher due to the access of easy credit.

  7. Interesting write up weenie.

    I don't have any P2P holdings at the moment but I might take a look some time in the future especially if it becomes possible to hold them inside an ISA.

    Thanks for the info and good luck with your new investments.

  8. Hi Jim
    I looked at Zopa and found it very similar to Ratesetter, although at the time, Ratesetter weren't charging any lender fees, so that's the one I went for.
    Yes, I think it's good to offer an alternative to the big banks. Good luck with your Zopa investments, am sure it's doing just as well as mine are!

  9. Glad you found it useful, Cerridwen.
    Yes, a good time to start could be when they are available within ISAs from next year. I think I will probably convert Funding Circle into the ISA, as it's the one that holds the most money.
    Thanks for the best wishes and hope you're enjoying the long weekend.

  10. Hi Anon
    By your reckoning then, my BTL is not unethical as my property was not purchased with high levels of credit that normal people cannot obtain.

    The price of my property = £60k
    My deposit = £35k
    BTL mortgage = £25k (plus arrangement fee), of which I have repaid around £6k.

    The tax treatment on mortgage interest does seem unfair but then again, normal people do not pay capital gains tax (min 18%) when they sell their property.

    So should everyone get charged CGT to make things equal? I don't really have an opinion on it, although Ermine seems to think they should.

    Thanks for stopping by and posting.

  11. Hi Weenie, Craig here from the York meetup!

    Nice article! If you'd like to involve yourself more in P2P lending discussions, there is a really good forum which covers quite a few of the most common platforms. I found it a good source of info:

    http://p2pindependentforum.com/

    Also I noticed funding circle are removing their auction system and replacing it with a fixed rate per risk band system. This will apparently bring everyone's average return down to 7% which is a shame as I was currently earning closer to 11% net! I guess its in anticipation for the massive money inflows all the platforms will experience when the ISA gets released next year.

    Keep up the good work!

    Cheers

    Craig

  12. Hey Craig

    Thanks, I'd heard there was a P2P forum but hadn't gotten round to checking it out so I'll have a little nose this weekend – thanks for posting the link.

    Yes, I got a letter from FC about them changing their auction system and introducing fixed interest rates. My earning with FC is around 10% so yes, dropping to around 7% will be a shame. It may mean that I look at loaning out small amounts to the more risky businesses, ie the ones in the D and E banding, with the latter staying at around 18%.

    I'll check out the P2P forum to see what people are saying about the changes to FC!

    Thanks for stopping by!

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