Make like a bank in the search for yield….

Tuesday 11th October 2016

In this issue of Money Truths….

  • A quick spin through the big picture….
  • A new game for yield-seekers….
  • Make like a bank and put your capital to work….
  • Be aware – rewards come with attendant risks….

A quick spin through the big picture….

Ex-chancellor George Osborne admits that low interest rates have served to help the rich get richer whilst damaging the interests of savers.

Thanks for confirming what we already knew, George. Thanks for bringing us yesterday’s news tomorrow….

Meanwhile, Back of England Governor Mark Carney has come out and said that there is little more monetary policy can do to help Britain’s long-term prospects.

He’s effectively batting the ball back to government and inviting them to rethink fiscal policy – tinker with tax rates, borrow and spend or both….

Sterling plummeted to a 32-year low against the dollar. Britain’s economy didn’t immediately evaporate following the vote for Brexit. But markets know that the dis-engagement process hasn’t even begun and that the road out will be long, complex and troublesome. Uncertainty rules – and the current weakness of the pound reflects it….

There is potential trouble elsewhere too. Italian banks are carrying too much bad debt. German’s largest commercial bank, Deutsche Bank, is also in trouble.

The German government has been advising its people to stock up on tinned food and water – in preparation against some undefined national catastrophe….

The bad bank debt of 2008/09 didn’t go away. It is still in the works. Who can say what havoc it will yet unleash on global financial systems? I certainly don’t know – but the German people are being advised to head for the bunkers when it hits….

And the situation in China continues to unfold like a slow-motion train wreck. According to the Bank for International Settlements, China’s credit-to-GDP (a measure that compares current borrowing levels against the long-term average) is three times the ‘safe’ level.

In other words, China is experiencing an escalating debt crisis – much like the rest of the world, only bigger. Much bigger….

The current credit-to-GDP figure of 30.1 is higher than anything ever recorded in the US, the Europe or Japan. If and when the Chinese situation starts to unwind, the shockwaves will be felt all over the world….

A new game for yield-seekers….

Those are the big picture clouds swirling, taking shape and dissipating in the skies overhead….

It’s good to be aware there is a storm brewing. Even if we can do nothing to halt its progress or stay its hand….

Down here on the surface of the Earth we must busy ourselves dealing with the issues we can control. Like seeking out the best sources of yield in the low interest rate environment we are confronted with.

As George Osborne admitted to Bloomberg last week, low interest rates have damaged savers. The returns on fixed capital deposits are so derisory, it is hardly worth the bother seeking them out.

It was only last month that M&G Investments – one of Britain’s largest bond funds – conceded that investors were better off holding their money in cash form rather than investing in bonds. I could say the same thing about cash on deposit in the bank. You might as well keep it under your mattress.

The game has changed. The days are gone when you could allocate your surplus income to a deposit account that paid a reasonable rate of interest, sit back and enjoy the compound growth over time.

Those days might return. But it won’t be in the foreseeable future. Low interest rates will be the norm going forward. The health of the global economy – fragile as it is – depends on them.

Right now a big rate hike to something approaching the median would be the equivalent of throwing the decrepit patient into icy water. You’d more likely kill him than cure him.

There will be no purpose served in playing a waiting game. The base interest rate is going nowhere good anytime soon. Last week some commentators were saying the next move is more likely to be down than up – to 0.1% from the current 0.25%.

And after that? Mark Carney is on record as saying he won’t go into negative territory with the interest rate. But his resolve is likely to be tested.

To find yield in this current climate, we need to look away from bank deposits and the traditional bond market where the trees are bare. But where to look?

There are options. As the old games grow tired and grind to a halt, new games appear to take their place. And some of them are quite interesting. Peer-to-Peer lending, for example….

Make like a bank and put your capital to work….

Peer-to-Peer lending is a relatively new development in the financial marketplace – and one that offers investors crucial options at a difficult time.

At a time when the banks are paying depositors the thin end of nothing on their deposits, an alternative is to play bank yourself and lend your surplus cash to individuals, small businesses and investors who then pay you back – with interest that outweighs what a bank will pay you for money on deposit.

Wellesley, for example, offer returns up to 2.35% per annum. They offer the opportunity to pool your money with that of other investors, and with Wellesley’s own funds, into asset-backed loans. The rate you get in return comes out of the overall rates borrowers pay Wellesley for the privilege of borrowing money.

So far Wellesley has made loans worth more than £330 million – mostly to investors in property. They are currently sitting on loan securities worth more than £400 million and they report that no investor with them has ever lost a penny of their investment.

Wellesley are not the only player in the market either. Landbay is another Peer-to-Peer lending middleman who finance property investors. Assetz Capital also lend to property investors as well as to projects focused on renewable and sustainable energy.

Landbay advertise rates up to 3.79% for investors. Assetz Capital offer a range of rates – which depend on how you want to invest, who or what you want to lend to and how long you are prepared to have your money tied up.

Zopa too offer a range of rates. You get to pick how you want to play. You can invest in ways that enable you to dip into your funds as and when you wish. You can commit to tying your money up for a set period. You can choose the level of risk you are comfortable with. Depending on your preferences, current rates on offer range from 3.3% to 6.5%. Zopa pools are focused on lending to consumers.

Funding Circle fund businesses. Ratesetter match lenders with households and businesses in the market for finance. Again, the rate you get for committing your money very much depends on the levels of risk you are comfortable with and how immediate your requirement is for access to your money. You are in control of all those factors.

The bottom line is that even risk-averse investors who require immediate access to their money at all times are able to get their hands on returns that the banks cannot match at the moment.

And you don’t have to go in big in order to test the water. Most of the pools highlighted above enable you to start by investing as little as £100. You can dip your toes in without over-committing, get a feel for how the process works and take a wider view from there.

Be aware – rewards come with attendant risks….

Of course, there is a risk element involved. That is an inescapable component of the Peer-to-Peer lending game.

The money you invest is pooled with the money of other investors and repackaged as finance which is then borrowed by individuals and businesses. The whole process is dependent on them actually re-paying the principal – with interest.

But the risk is spread. You are fully diversified. Your money doesn’t go directly to one borrower. It is instead sliced up and distributed across multiple loans. If one loan fails that doesn’t mean your investment or your rate of return is completely wiped out.

It is easy to see though where problems might occur – if or when loans turn bad in significant numbers.

But even then there are protections. Some schemes – like the ones run by QuidCycleand Zopa – have provision funds in place so that lenders don’t lose out if or when borrowers default on loans. These are funded by a levy charged to borrowers at the start of the loan term.

And the Peer-to-Peer industry is now covered by FCA regulation – requiring lending services to be up-front about risks and have plans in place in case something goes wrong. From April next year all Peer-to-Peer service providers will need to have a buffer in place, amounting to at least £50,000, in case they run into financial difficulties.

The key issue to bear in mind is that Peer-to-Peer lending is not yet covered by the Financial Services Compensation Scheme – which pays out up to £85,000 per person or £170,000 for joint accounts in the event of a bank or building society going bust.

On that basis I would be very cautious about wading too deeply into Peer-to-Peer lending schemes.

So far such schemes have issued loans worth £5 billion to 350,000+ borrowers and there have been no problems. But, even so, I wouldn’t want to be the pioneer breaking that new ground and I wouldn’t want to be committing the whole farm.

But for more modest amounts of capital – that might otherwise end up in a deposit account paying next to nothing – enhanced rewards are very much on offer and very much worth considering against the attendant risks.

That’s how it looks from here….

All the best,


Dave Gibson

Money Truths