In some ways, Matthew Dodd is not your typical peer-to-peer investor. Many of the industry’s earliest adopters were nearing retirement age, attracted to the higher yields that P2P could offer as a means of boosting their pension pots.
But Dodd, a millennial, already invests in a handful of P2P platforms and has even been entrusted to allocate his family’s money into the sector.
“My first experience of P2P was actually straight after I graduated from university in 2013,” he tells Peer2Peer Finance News.
“I had an internship at an investment bank and there was someone there was that was quite interested in the P2P space and who invested in ThinCats’ platform.
“I didn’t know anything about it at that stage, but he explained that there were some good opportunities.”
His first equity investment was in Royal Mail’s initial public offering in October 2013. The hugely oversubscribed sale saw shares rise 38 per cent in their first day of conditional dealings on the London Stock Exchange.
“It did quite well and got me interested in investing my capital,” he comments.
But Dodd did not get properly involved in investing – in any shape or form – until he had his first full-time job at Oxford University Endowment Management (OUEM), which manages the £2bn of Oxford funds on behalf of 28 collegiate university investors.
“We were investing across all types of asset classes and geographies, with the biggest allocation towards public equities,” he says. “We also had private equity, venture capital, credit and property.
“So I got a good education in finance there for two-and-a-half years and learnt a lot about the space.”
Armed with his new knowledge, when Dodd had more money to invest he looked toward P2P amongst other opportunities.
“I put it passively into equities and into P2P lenders such as Funding Circle and Zopa,” he says.
“I didn’t have that much time to keep going through platforms like ThinCats and do the due diligence on the opportunities that were coming up, so I went for a more passive approach.
“I left OEUM last August and invested both my money and my family’s money. My parents had retired, so they had a bit of money, but they didn’t have a background in finance.
“They were looking to get higher yields than they had previously been able to get, but obviously, with interest rates now, they were struggling to earn money.”
Dodd has just under 50 per cent of his portfolio in public equities, around 30 per cent in credit – “which is basically P2P” – and around 13 per cent in what he calls venture, which includes early-stage investment and cryptocurrencies.
He is not afraid of taking some risks with his portfolio, but feels that diversification gives him more stability. His best returns so far have come from what he sees as the riskiest part of his portfolio, namely cryptocurrencies.
He has enjoyed bumper returns on his Ethereum and Bitcoin investments, but he accepts that these are early-stage technologies that “could go to zero”.
“I’ve made some money and trimmed the position now to rebalance my portfolio, but they’ve been very successful recently,” he explains.
“Obviously you’re not going to see returns like that in P2P but you’re not going to get the high volatility either.”
When it comes to P2P platforms, Dodd looks for brand visibility and longevity, as well as a proven track record.
He invests predominantly in Funding Circle and Zopa. He has dipped into ThinCats and has put £1,000 into RateSetter to take advantage of its £100 cashback scheme, which has now ended. He also has some money with Lendy, formerly known as Saving Stream.
Like all of his investments, diversity is key when it comes to P2P, Dodd explains.
“I consider the return you’re getting and the risk you have to take for that return,” he asserts. “Each platform has a slightly different way of going about that, so I think diversity is obviously very important in the sector.”
Read more: Investor profile – Calculated risk
P2P investments do not tend to be the most liquid of assets, so Dodd finds the secondary markets offered by platforms to be useful if he wishes to sell a loan part before the maturity date.
“It can be helpful because that can reduce your risk, as obviously defaults tend to occur later in the life cycle of the loan,” he explains.
When it comes to active versus passive investment, Dodd is only prepared to spend time researching specific opportunities if he thinks he can add value, particularly as P2P does not make up the majority of his portfolio.
“How much better am I at picking good loans over bad loans? I feel I might have a bit of an edge in the property space,” he says.
“That’s why on Lendy I look at all the opportunities carefully. Also, they’re slightly higher-risk investments. When they’re higher risk, you have more to gain by being active. If they’re quite low-risk investments with better credit grades, it can be more difficult to discern which are good and bad investments, especially after they’ve passed the criteria of whichever platform they’re on.
“So I take a kind of semi-active approach, where most of it is passive, as I think that’s a good way to get exposure, but on certain platforms, I’m a bit more active.”
Dodd is not overly enthused by provision funds and says he would opt for a higher yield if he had a choice.
“The way I see it, you’re essentially buying insurance by having a provision fund,” he says. “You’re going to get a lower return, on average. If you can ride the volatility and take the losses, you are going to generate a better yield.
“If I were recommending it to someone, it would depend on their appetite for risk. Because I have quite a diversified portfolio overall, I’m happy to take more risk.”
Despite his confident approach to risk, Dodd prefers to opt for secured loans. He argues that security can be a good cushion against defaults, even if you can only recover a proportion of the initial investment. However, he highlights the fact that the value and type of security need to be taken into account.
“I think you always have to discount your security; you can’t take it at face value,” he asserts. “You have to expect that you’ll get less than whatever the security’s valued at, just because of the costs of recovering the security and any possible change to its value.
“For example, if it’s property, property prices might fall and you might not be able to generate a sale. Or things like personal guarantees often don’t hold up in court.”
Dodd has not taken up an Innovative Finance ISA (IFISA) yet, although he uses a tax-free wrapper for his stocks and shares. However, he would use an IFISA when one of the platforms he currently invests through launches the product.
“I think it’s actually more attractive to protect the income from P2P because a lot of the gains from stocks and shares will come from capital appreciation and you have allowances for that,” he says. “Also, capital gains tax is lower than my income tax would be. The P2P income would be taxed at income tax levels, so it would be more beneficial to shield that from a tax perspective rather than to shield stocks. So it’s definitely something I’m looking into.”
Looking forward, Dodd is planning to maintain P2P as a sizeable part of his portfolio, although he reiterates his diversity-is-best strategy.
“I’m fairly comfortable with what I have presently,” he comments. “I need to do some more research into the platforms as I’m sure there are some more interesting opportunities out there, but it has been, and will continue to be, just a staple in my portfolio that continues to generate some pretty attractive returns.
“It’s not a priority for that reason, as I could probably eek out another couple of per cent from it if I shopped around a little bit, whereas other parts of my portfolio, like the cryptocurrency investments, have the potential to generate much greater returns. For example, my holding in Ethereum which appreciated over 400 per cent over a couple of months.
“If you get those kinds of bets right, it far outweighs seeking out a small amount of extra return from P2P. However, in order to be comfortable to take those types of risks, I need to have a decent part of my portfolio generating a consistent return.”
Dodd, like many industry onlookers, notes the fact that P2P has not yet been through a financial crisis. He sees a downturn in the economy as the real test for the industry, to see how it weathers a real uptick in default rates.
“Equities would probably get harder hit, but again, diversity among sectors, borrowers and types of risk is important,” he says. “Unless a downturn were particularly bad and that’s obviously very hard to predict, I think P2P would still offer a decent reward-to-risk ratio.”
Despite his predilection for P2P, Dodd admits that he would be a less enthusiastic investor if interest rates weren’t so low. The Bank of England lowered the base rate to 0.25 per cent last summer in the wake of the Brexit vote, which contributed to the influx of retail investors who flooded towards the P2P sector in search of yield.
“If interest rates were five per cent and you were getting six per cent from P2P, I’d probably take the money that’s backed by the government in terms of losses,” he affirms. “But when it’s near to zero per cent, that’s a significant amount of return you’re losing.”
For now, the cost of borrowing is set to stay low so Dodd’s P2P loans won’t be going anywhere. He sees himself as a long-term investor.
“I think about liquidity on a holistic basis in my portfolio,” he says. “I try to be quite a long-term investor, but liquidity can dry up if times turn sour and that is something we need to be cautious about.
“While liquidity is good, I’m happy to hold all of my loans until maturity and hopefully still have a positive yield, even in a crunch.”