Harmoney

[leesal]

But that principle earns interest, so you can't simply remove it.

I don't agree, but that's my take. There is so much going on in the early phase that pretty much any numbers will be of little value - better to wait for things to mature a little. An example is your example of 50% over return on an individual PP loan over, I assume, a very short period - completely pointless to consider this in this way. It's like fully valuing in a upfront fee at the start of a loan instead of across the whole period of the loan which it actually applies to.

No it doesn't, they are completely different things. There is no point comparing RAR with XIRR, sorry, I think you are wrong here.

Regarding payment protect:

No you are not removing the interest received. You work out the payment protect portion of the principal. If its $1.13 on $25 principal, it represents 4.3% of the outstanding principal on a loan.

How harmoney treats payment protect is this:
1. Take out a loan, your cash balance reduces by $25 and principal outstanding increases by $25. A net zero.
2. Payment protect unfunded, $1.13 is added to your principal outstanding; Increasing your cash balance by $1.13
3. You receive a payment - for the principal portion (eg 31 cents); 31 cents is added to your cash balance, and 31 cents is deducted your outstanding principal. Its a net zero effect.
4. For the interest potion (eg 25 cents); 25 cents is added to your cash balance. Increasing your net position by 25 cents

Net impact in month 1. of the payment protect loan is $1.38 increase in net position

How I treat payment protect is earning out the payment protect principal over the life of the loan. So the transaction flow goes like:
1. Take out a loan. +$25 principal; -$25 cash
2. Payment protect: $1.13 is excluded; 0 net effect
3. principal of 31 cents is earned. We know that this principal is broken down as 95.7% original loan and 4.3% payment protect; working out a 1.3 cents of payment protect earned for that month. So what we do is earn the payment protect by recognising this portion. This is done by increasing your cash position by 26 cents and decreasing the outstanding principal by 24.7 cents. a 1.3 cent net effect
4. Interest portion: +25 cents net effect

Net impact in month 1 of therefore changes to $0.26 increase in net position.

You can extrapolate each of the scenarios forward, if you assume the average age of your portfolio of payment protect loans is 12 months

1. Harmoney's treatment (on loan of $25, with 12% interest rate, and payment protect $1.13)
= $2.79 of interest earned; plus $1.13 of payment protect = $3.92 increase in net position.
The XIRR on this payment protect loan is 18.7%

2. The earned treatment (same loan)
= $2.79 of interest earned; $0.16 of payment protect fee earned (0.043% x $3.38 principal) = $2.95 increase in net position.
XIRR of 13.4%

Take that over an entire portfolio, eg 25% oustanding payment protect loans; 75% non payment protect or paid, all portfolio 12% loans over 60 months

harmoney's treatment would net you 75% x 12.6% plus 25% x 18.7% = 14.12%

earned treatment would give you 75% x 12.6 plus 25% x 13.4% = 12.80%

2. Accrued income:

My take is its important, your take is its not; With a portfolio of 6 months say $50,000 at an average of 20%... 15 days of that income is not getting recognised on average, so thats $400 odd that forms part of my return. Again if I've only earned $2400; thats relatively significant part of my return... However concede as your portfolio gets larger then becomes less significant. Yes there is a lack of defaults early on, by there certainly isn't a lack of late payers, which has the impact on XIRR. Yes you can argue your return doesn't matter early on, but try telling that to the next new guy who comes on.

3. Tax
Yes tax matters. Tax treatment matters, being able to deduct service fee matters. I like to keep all of my performance metrics tax free, so I can compare without worrying about the differential tax treatment. So I know that my company is returning 17% PBT return over the life of the business operations; shares 21% before tax return; pension 9% if you have investment property can shove that figure in... Alistar mentioned that he liked to know his after tax return that harmoney was reporting to him. even though he could later claim back the tax deductible part of the service fee (and possibly defaults). I like to know I've generated 20% in interest revenue, 4% service fee and 4% defaults so my overall return is 12%... Then I can benchmark that against my other investments. As soon as I start relying on harmoney's reporting, where I'm taking the 33% against the 16% giving tax of 5.28%, so a post tax of 6.72%, which really should be 8% it gets bloody confusing. So all returns pretax thats just a general rule. And yes I like to benchmark it against RAR%, as the overall measure. If I know my RAR is 10% and my XIRR might be 12%... and the average RAR is 13% of a mature portfolio, that gives me some ability to say that I can increase my XIRR% up to say 15% by introducing a different mix, or different risk selection

4. Whether you download my spreadsheet
It doesn't really bother me in the least. in the end we are all collaborating here, so if I share my methods then someone may critically evaluate them, and add an insight. It might help someone elses overall strategy, and we both benefit. If you call me out on something, then thats good its provides the ability to learn. I am not getting involved in personal insults... So will just ignore certain things of which there seem to be quite a bit of material for me to ignore... As a relative newbe I also recognise there is a learning curve. I also recognise that % return now counts for little, given the hazard curve of defaults, and prevailing market conditions in the credit market which now are extremely favourable for investment and might deteriorate significantly in a relatively short period of time. So overall Myles as you wish, I concede that with 100k in, your probably not too bothered about a few % of XIRR one way or the other.....