Part 2/2: Why Marketplace Investing Could Improve Your Overall Returns
28th May 2015
No well-informed advisor would suggest placing 100% of your investable cash into marketplace investments, however including these types of investments in a wider portfolio can be a powerful way to improve overall returns. There are a range of reasons why both equity and debt crowdfunding investments have a place in every healthy portfolio:
Consistent, strong returns: According to the websites of the three biggest UK Peer to Peer lending platforms (Ratesetter, Zopa, and Funding Circle), investor returns as of March 2015 are averaging 6.1%, with Funding Circle the highest at 7.1%. These figures are pre-tax, but include all fees and expected defaults. Individual results will of course, vary, and individual commercial loans tend to have higher returns than personal loans (gross returns are often as high as 14%, with the lowest being 6%, both before fees). This compares favourably with the 7.3% average return of the FTSE All Share Index in the 27 years between 1986 and 2013, whilst the FTSE 100 index returned an average 6.6% over the same period. In fact, Funding Circle’s 7.1% annual average net return would have beat the FTSE All Shares Index 36% of the time over the same period, in large part because of the high volatility of the FTSE.
Diversity: Although most investors go to great lengths to build diversity into their portfolios, the vast majority of options available to retail investors are based on debt or shares of large corporations listed on exchanges, which in itself forms a sector of the economy and to some extent moves in tandem, at a different pace than small and mid-sized businesses. By investing in Peer-to-Peer loans, retail investors can for the first time access the returns of small and mid-sized businesses, or even personal loans returns. By investing small individual amounts into a broad number of Peer 2 Peer businesses, investors can earn an average return that reflects the pace of growth of small businesses, with the added benefit of knowing that invested money is helping to grow small businesses and create jobs.
Invest like a big hitter: Buying into unlisted equities has traditionally been available only to investors with large sums to play with, particularly when the need to diversify is factored in. If the minimum threshold for investment was to be £25,000 (quite low by the standard of most off-market raises), who could afford to diversify across 5 or 10 different investments? Equity crowdfunding lowers the hurdle, and allows investors of a much broader range to build a portfolio with individual investments as small as £20. By being careful, assessing the pros and cons of each deal and a bit of luck, any one of us could find ourselves an early-stage shareholder in the next big thing.
Be a first mover: With 5 years under its belt, Peer to Peer investing is still winning over new investors. Response from borrowers has been quicker to build, and this imbalance may be contributing to higher yields for investors, in which case getting money deployed into investments now will help to lock in while rates of return are strong. With that said, however, Funding Circle’s data shows that average investor returns increased by 1.4% between 2010 and 2014. This may also be due to reduced rates of default from improved risk modelling, but whatever the case, the fact is that rates are very good now, and may change in the future. It’s certainly fair to say that when returns are good, the smart money moves quickly to secure a profit, and Marketplace Investing should be no exception.
Strong tax advantages: Because of the opportunities for growth and job-creation, the UK government offers some very powerful incentives to invest in equity for very early stage business. Two of the best are the SEIS or EIS schemes. SEIS is for “seed” businesses (hence the extra “S”) raising their first £150,000 of share equity, whereas EIS is for up to £5m and follows-on after the SEIS round is used up. Without going into all the detail, SEIS allows investors to credit 50% of their investment against their income tax payment, or 30% with EIS. Additionally, any losses can be deducted against the investor’s tax bill net of prior deductions, and as long as investors retain their shares for at least 3 years there is no capital gains tax to pay on exit. These are powerful perks, as the net cost to investors for every £1 invested is only 50p with SEIS, or 70p with EIS.
By Craig Snider
Past performance and forecasts are not reliable indicators of future results. Your capital invested is not covered for compensation in the event of a loss by the FSCS. Tax treatment will depend on the individual circumstances and may be subject to change. Please see our Risk section before making an investment decision.