P2P Portfolio Analytics(December’2018)

Wish you all a very happy new Year

I am publishing my latest P2P returns and performance.Will also provide comparison with my last month portfolio performance.I have evaluated more than 10-11 platforms before investing in these

Portfolio Synopsis: I have been  investing in 3 platforms actively for the past 12 months. I have added couple of more platform

Portfolio Composition

 

I have added Cashkumar and Rupee circle to my portfolio while reduced my exposure in Faircent .

  • Calculating Portfolio Performance:( I have covered methods to calculate portfolio performance in my earlier report(November)

LendenClub (use code LDC11989 to get discount) : For lenden I have used conservative NPA approach where any delay more than 45 days past due date is considered default and written off)

 

 Provision I have kept as  the amount of NPA I can tolerate to get 10% Return on my investment,

My ROI in Lenden has improved thus now I can tolerate higher NPA (reason is I have been investing in 40%+ interest loans ,thus I have higher appetite to book npa)

Future EMI

I2I Funding:

My december ROI has declined as i recently put one big loan in NPA because of EMI delay though it might not default in future. It was an old investment as now I dont invest more than 5000 per borrower in I2I to avoid concentration risk

Future EMI:

Faircent:

 

I am in the process of unwinding Faircent portfolio

Future EMI

:

Now lets see Total portfolio Performance and Strategy

   

 

Returns look fine considering I have been Conservative in my calculation.Replacing Faircent with other p2p should increase the ROI over next 3 months

Now lets see the future EMI

 

 

As  I had invested more in short term I have lot of inflows in the near future and thus need to balance out my lending long term

 

Strategy Going Forward:

 

  • Move all Faircent EMI to Lendenclub(better risk adjusted Return)
  • Monitor  Investment in RupeeCircle and grow book(use code PIND145 while registering to get portfolio analysis reports)
  • Increase investment in I2I  (use referral to get portfolio analysis https://www.i2ifunding.com/referral/ud8cwng83/invest   )
  • Increase investment in cashkumar( positives are:short term loans(<6 months), overall good platform performance with low npa, high interest)  Mail me for referral !
  • Will Run Portfolio analysis next month again and compare results

People who wish to construct a quantitative P2P portfolio can mail me.

 

Systematic Investment Plan Stress Testing

We all know the  benefits of doing Systematic Investment Plan(SIP) .It helps to average our buying cost and negate some of the impact of volatility.Many website allow you to calculate return if you do SIP based on average mutual fund performance.

The million dollar  question is how would a SIP performance look like in a major market downturn and how effective it is compared to a lumpsum investment. In the past 100 years 2 major market crashes stand out.The great depression of 1929 and the Japanese stock market crash.I dont consider 2008 crash as an issue ,it is pretty obvious the duration of the recession was not much and people who  kept on  investing made money.

Lets  see if those recession happen today what catastrophe we would be dealing with! Look at the charts of the two brutal crashes,both  lasted decades.

Great Depression
Japanese Market Crash                                                                              

I will superimpose monthly return of S&P levels of 1929 to  current Nifty levels. So Lets say Indian market enters a great depression and on top of that our poor investor had just started his systematic Investment  Plan.Our investor doesn’t panic and he keeps on investing . Lets see  how his wealth and fortune will change.

  • Great Recession Super imposed on Nifty (10000 considered as starting point).
  • Someone who would have entered  lumpsum  today would take 25 years just to break even!!!.You can see on the graph the initial level is attained near 2043
  • Maximum drawdown  would be 85%.For 1000000 invested he would lose 850000!!

.How does SIP payoff perform?

  • I have plotted graph of SIP monthly investment vs SIP performance.(black line is the growing SIP contribution,red is the value of assets)So in 2035 (17 years) we would be  break even and most of the time our drawdown are not bad. compared to Lumpsum. Worst drawdown is -350000 .We can clearly see our investment  are less volatile ! Infact by 2043 our investment would have grown by 80% 

Incremental SIP 

Now what happens if I increase SIP .08% every month ( assuming people generally grow salary at 10% a year.Take a  monthly percentage which will compound to your annual growth number).

We can see our profit and loss volatility drops further. We are averaging more at a lower level ! In 7 years we are   breakeven  and beyond 2040 profits are going to rise up exponentially

Comparison Constant SIP vs Incremental SIP:

Lets compare the returns for 25 years( i.e as of 1/07/2043). We use XIRR  when we are considering periodic cashflow. Basically XIRR tells us the net return when cashflow are erratic

  •  XIRR for Regular SIP =  5.77%
  • XIRR for Incremental SIP = 7.52%

For the Lumpsum investment we will consider CAGR (Compounded Annual Growth Rate).

  • CAGR for lumpsum = .08%

So we see Incremental SIP is the best followed by regular SIP and the Worst is Lumpsum.

People generally tend to think if they dont put all the money in equity at one go they will miss the rally.Actually difference between SIP and Lumpsum  is the incremental return you get for holding the asset till SIP starts.If we can find good money parking method our SIP can beat Lumpsum even in bull market. As we know long term equity average return is around 11% .If we can find an asset to park close to 11%( highlighted in green,20 bucks parked in those assets)  we are almost replicating the market with added advantage of very low volatility!

Points to Consider

  • Always go for SIP to avoid huge draw downs
  • Gradually increase the SIP  based on your earning growth even when market is going down.
  • One big factor is in a recession  people will lose their job or will have lower income so its almost impossible to rely on external cash inflow  for continuing SIP.It is therefore very important that people only put a  part in SIP and rest in some other assets  which they can use to continue there SIP under adverse situations
  • As we see  if we can find good money parking assets then we do not miss the opportunity cost of not being fully invested in market and also  lower the risk of stock market volatility
  • I will show in my next post how Peer to Peer lending(P2P) can be used to create an ideal platform to perform SIP.

 

 

 

Hidden Costs of Investment Products

Iphone is popular,so is Versace ,Chanel and BMW. We only pay premium for products were we perceive  higher value.It can be in the form of quality,features and so on.Some people argue that these brands are overpriced because certain similar products cost far less. The argument is quite subjective because for someone the prestige of owning a Prada bag is superfluous but for others it could be a pass to fit in a social circle.

What about Financial Products? Can the brands command a premium .is it justifiable?Well like other products a higher cost must translate into some kind of value.The problem lies in the fallacy that there are ways to achieve higher returns without taking additional risk .So now when I have a cap on the value of return someone can give me , what is the company offering me extra? maybe lesser risk .Again the lowest risk technically is in the sovereign bond .So now when  i have both a cap and floor of risk adjusted returns and its  a small range to spend a portion of it on products which add no value!

I have worked in Asset Management,Proprietary Trading,AIF ,Structured Products and one thing has been common if someone can make money they will do it for themselves not sell it for small commission!

Lets take an example:

A fund X gives its client 10% return  on a average.

It charges 2% fees.

what is the client left with ,8% and that too offcourse with higher risk than a government security.

If a low cost debt fund  is paying 8.5% for that tenure and it has indexation benefit you will get close to 8% Returns.Its better to take a known risk for a given return than an unkown risk.

So our high flying company X is a rip off for the client.Took more risk and gave inferior returns .That sucks! The Company charged me 25% fees(2%/8%) for nothing.

This is no anomaly! The amount of money people trust on such institutions is mind boggling! No wonder finance industry is a coveted place to be in.

One should only use an investment product or service if it provides a payoff or exposure to asset classes which can not be  feasibly achieved through replication at a lower cost.Examples of it would be PE firms investing in growing startups or P2P lending platform

Let’s see what kind of money management services are there in the market and how they have fared and then we will figure out ways make our money grow ourselves!

AIF/Hedge Fund: Indian hedge Fund Market stands at 3.5Bn Dollars.Most structures charge investor a 2% management fees and 20% of profit generate over a given hurdle rate. They are available only for high networth people.Strategies like Long Short stock baskets ,Derivative trading are used to generate Return.

If a firm generates 20% and hurdle rate is 10%.Net return would be 20%-(20%*10%)-2% = 16%

Over that you might end up paying more if you go through an Investment advisor or RM .So after tax you will be making around 10%.Looks good standalone but when we compare it to the benchmarks results seem dismal.

Report generated by EurekaHedge shows the comparative Analysis:

The Returns have been less compared to the equity market but if they provide hedge against a bad time then it might be good deal.The correlation figure show that results are highly correlated to Indian Equity Market.

Below is 12 month rolling alpha considering zero risk free rate.

Had we considered risk free rate at 7% our alpha numbers would have dipped in negative territory.

There is no denial that some funds give good return during some year but to find those funds and be in those funds at the right time is no easier than picking a multibagge r. Then why do so many people flock to put money in these products.Good marketing,Shiny Prospectus with big numbers, Fancy strategies

 

PMS: The case for PMS is that they are more customized than mutual fund and can provide returns and risk profile as per the investor demand.The drawback is higher tax implication ,management fees.Minimum investment is 2.5 million INR so you need to have a big portfolio to put in a part in PMS.Again fees structure can vary but generally includes 2- 2.5% fees plus profit sharing .It doesn’t leave much if returns are low.

The performance of PMS has been very diverse.On hand some PMS have generated 40% CAGR while some  couldn’t even get through 2 digit returns.

The correlation with broad market is high as investment is in long equity position. Comparative Analysis of top PMS with Mutual Funds:

A couple of PMS might have given better return than the small cap Mutual funds but an average PMS with management fees,commission etc which could be close to 6% will be losing bet.These performance are in a bull market and we should not mix bull with brain!!

Mutual fund investment any day provide better risk reward ratio because:

  • PMS in not tax efficient .Dividend are taxed at higher rate as you own the stocks
  • Mutual Fund offers to invest through SIP(systematic Investment Plan).You can average your cost which is very helpful in a falling market
  • Higher Fees in PMS offset any alpha they can create in the portfolio

Structured Product:Structured products offer investors the potential to earn returns tied to the performance of an index or basket of securities. Rates of return vary and are generally paid at maturity, along with the face amount of the investment, subject to the credit risk of the issuer.

Structure of the product comprises a zero coupon bond with an option:

Some of these provide principal protection and give a comfort to the investor that they can participate in the market while protecting the capital.In essence they are trading their market risk for credit risk of the bond.

I have worked in Structured Products and the cost embedded in these products are huge.Most of these products can be replicated at lower cost by people with some understanding of derivatives. I will dwell upon details to create various structures  in my future posts.

 

Mutual Funds: Mutual funds market has grown immensely in the last few years ,thanks to the raging bull market and it has been a great well creator for many.It definitely has cost attached to it called expense ratio(TER) .If you buy a regular plan through broker you end up paying even more.

So is mutual fund the most optimized solution. Most mutual funds are not actually how they market themselves to be.Lot of so called Large Cap Funds have mid cap holding etc .So we need to understand in totality what kind of portfolio we want and then use combination of low cost ETF ,Debt Funds and small cap funds to replicate our desired portfolio.The difference in alpha between ETF and mutual fund have diminished over the years as market have become more efficient

Another factor is that lot a of MF keep around 7-8% money in cash.Replicating using ETF we are able to get higher leverage with same volatility.Using equity options in conjunction can further enhance returns.I will  post my replication of a mutual fund portfolio using ETF ,Index Fund and small cap which is able to generate higher return at same volatility!

 

Life Insurance:Life  Insurance is something which is not possible to replicate for a  normal person but it comes with a caveat.A term insurance is not possible to replicate but whole life Insurance and ULIP can easily be replicated using combination of Term insurance ,mutual funds(Debt,Equity) and ETF .Not only they can be replicated but also provide better return.So if somebody wants to create a retirement corpus its wise to  buy a term insurance and based on the corpus he wants to create invest in various assets which can provide that return in that tenor.I will  provide a comparative analysis of various insurance products with do it yourself superior strategy!