Harmoney

[Vagabond47]

As I understand it loans that go to the instututional pool we never see, so the 65% is probably the autolend.

[kiwi_on_OE]

From my perspective the quality of the loans has also gone down since Xmas - so Harmoney telling porkies on volume and quality

[BJ1]

A cynic would suggest that Harmoney has decided that the only way to make a buck given what is a fairly static portfolio total is to make a margin on loans subscribed for by Harmoney itself. Essentially that is what the announcement indicates, in which case retail is likely to continue to see what both kiwi on oe and I have seen the past few months - poor quantity and quality; and why wouldn't the platform cherry pick the loans?

[myles]

and why wouldn't the platform cherry pick the loans?

Because it would likely lead to a huge fine and/or some time in jail... I personally don't believe this is happening.

[nickw]

One of the main points about investing in P2P is the diversification of the funds and the importance of having a small amount of investment in many loans. This is a key point that Harmoney make to all investors. Only last month (February), the Lender blog was discussing imaginary portfolios by Jack and Sarah, and the importance of spreading the risk over a large number of loans.
https://www.harmoney.co.nz/lender-bl...y-unique-loans

It seems ironic that Harmoney should continue to impress the importance of diversification whilst at the same time reducing the number of loans available to invest in. As of the time of writing there were only 5 loans in the last 24 hours.

[RMJH]

One of the main points about investing in P2P is the diversification of the funds and the importance of having a small amount of investment in many loans. This is a key point that Harmoney make to all investors. Only last month (February), the Lender blog was discussing imaginary portfolios by Jack and Sarah, and the importance of spreading the risk over a large number of loans.
https://www.harmoney.co.nz/lender-bl...y-unique-loans

It seems ironic that Harmoney should continue to impress the importance of diversification whilst at the same time reducing the number of loans available to invest in. As of the time of writing there were only 5 loans in the last 24 hours.

Pity they don't provide specific usable advice, for example how many loans of a particular grade is enough to give the expected return to a specified probability. The generic "don't recommend more than 4 units in one loan" is absurd because it takes no account of portfolio size.

I'm thinking a better way to maintain, or even grow, investment might be to reduce diversification rather than drop filters. I have 1000's of loans, maybe that could be 100's with a negligible increase in volatility of returns? Anyone know how to crunch the stats or got some rules of thumb?

[myles]

I'm thinking a better way to maintain, or even grow, investment might be to reduce diversification rather than drop filters. I have 1000's of loans, maybe that could be 100's with a negligible increase in volatility of returns? Anyone know how to crunch the stats or got some rules of thumb?

First read this Lender Risks and this Diversification, both contain some good info.

I posted my thoughts on this a ways back - it went something like this: (note this is based on my loan selection of typically C and D grade loans)

For a $10,000 investment, diversify at $25 per loan - this is the minimum for Harmoney (an investment smaller than this has a potentially higher risk due to lack of diversification). This works out at 400 loans (on a fixed set of loans 10000/25). If one loan defaults, that works out at a loss of (25/10000)*100 = 0.25% of initial investment (based on loan defaulting from day one). The overall average default rate varies depending on loan selection.

My thinking is that the above ratio of loss is more than acceptable (industry suggested diversification rate is 1% - 100 loans).

So my thinking is that a minimum of 400 'whole' loans (or more), no matter the investment size, will give 'enough' diversification. So for an investment of $50,000, a loan size of 50000/400 = $125 per loan will give the same level of diversification.

In actual fact the diversification is much better than this since, as loans age, they become smaller (partially paid off), so although, in the previous $50,000 example, 400 loans are invested at $125 each, over time, this will result in many, many more loans than the initial 400 as older loans shrink over time.

So my suggested diversification volume is 400 'whole' loans (or more) for whatever total value you invest.

Added: I currently invest in 8 - 10 notes per loan ($200 - $250) based on over $100K invested. I believe this is probably still significantly more diversification than required, but I'm happy with that level. (I currently have around 1000 loans).

[RMJH]

Thanks Myles. It has been a while since I thought about this but I think the rules of thumb be it 100 or 200 etc are focused on not making a loss rather than providing confidence intervals around expected returns. Seems like about 1000 loans are required to practically remove random volatility of returns. And that's per grade not total portfolio. An impossible task given current listing numbers. I've posted this article before but it's still thought provoking https://www.lendingmemo.com/risk-div...n-p2p-lending/

[myles]

Seems like about 1000 loans are required to practically remove random volatility of returns. And that's per grade not total portfolio.

Simply out of interest, the following two graphs are ones I use to 'track' my portfolio and may offer some insight into 'volatility' of loan value vs defaults:

grades.jpg
CRAR is my calculated return on current loans - this shows the movement over time of the calculated rate of return of my approx 1000 current loans. Obviously the higher risk grades are more volatile. [A and F grades not shown due to low numbers.] I really don't think it would be possible to provide detail on the number of loans you should invest in for a stable return as loan selection plays such a large part.

watch.jpg
Harmoney's arrears value on the left green/brown plot (I don't have much faith in it as I've never been able to work out how they work it out...), charge off value on the right orange plot. From what I can tell Harmoney can often process charge offs in 'lumps', hence the 'chunky' graph.

Note: maturity of portfolio has an impact.

Over Diversification: One thing I forgot to add was that I think over diversification is a real 'thing'. If too high a number of loans is aimed for, you tend to start reaching for loans either outside your risk profile or perhaps loans that are best left alone, just to ensure a large spread (diversified) set of loans. This will very likely reduce the value of the loan set and increase the volatility of the overall portfolio.

[beacon]

One of the main points about investing in P2P is the diversification of the funds and the importance of having a small amount of investment in many loans. This is a key point that Harmoney make to all investors. Only last month (February), the Lender blog was discussing imaginary portfolios by Jack and Sarah, and the importance of spreading the risk over a large number of loans.
https://www.harmoney.co.nz/lender-bl...y-unique-loans

It seems ironic that Harmoney should continue to impress the importance of diversification whilst at the same time reducing the number of loans available to invest in. As of the time of writing there were only 5 loans in the last 24 hours.

Loan numbers have been dismally low for most of the moons since before Christmas now. That's three months, compared to the last time they did this for a month or so - in June last year.