Bondora - Part 2

First I started to invest with Portfolio Manager; if I remember correctly I choose a Conservative profile, just to try. First year everything was great, returns were high but being already mindful of the platform default risk, I started to withdraw 100 euro every 200 euro of profits. I wanted to let the compounding do its miracle but at the same time take something back just in case.

At the beginning of 2016, the first defaults started to materialise and the reporting package changed, Bondora initiated a long campaign to defend its new method of default loan accounting; I was lured into it, you have to wait the whole life of a loan to properly compare results between repaid and default loans…no?

In the meantime, I saw the proportion of F and HR loans grow even if I did not change the portfolio profile: Bondora explained that if the portfolio return was lower than the target return, they were effectively taking in more risk to ‘re-align’ the portfolio. If you are familiar with the standard 60/40 stock/bond portfolio and annual rebalancing, this makes sense: after a year where stocks crashed, you sell bonds and buy stocks because you want to maintain the 60/40 proportion and assume that stock returns will mean-revert to their historical, forecasted range. Obviously, this makes sense only if your long term expected returns for stocks and bonds are correct: if stocks will never mean revert and continue to go down, you are simply piling up losses and losses. Same with Bondora’s ratings: if a certain year you have more defaults than expected, you want to increase you risk, if your model is sound. If your model is a partial shit, i.e. you correctly divide each borrower in the right rating class but each rating default rate is higher than expected, you simply accelerate your ruin. Ironically, if you model is a total shit, i.e. everything is random and lower ratings can perform better than higher ratings, you end up in a better situation because you are actually lending at higher rates but with the same overall default risk. Some months in 2017, September and November, were great: all the loans that Bondora gave me defaulted…and they defaulted without even making a SINGLE payment.

I then decided to take more control and use the Portfolio Pro: no more non-sense >90% interest rate loans, only EE and FI loans up to D rating.

Results were better but there was still an aspect that I did not like: I was investing in loans with unverified borrowers. Yes, the myth about p2p lenders is that they can be more productive than brick and mortar banks because they leverage technology and are free from legacy systems; the reality is that they simply rely on statistical models and check loan documentations 50% of the time to save costs (unfortunately this a common practice, see Lending Club in the US). Portfolio Pro does not allow me to screen for verified borrowers, even if I think should not be a particularly complicated filter to implement by Bondora…what to do?

Welcome the Secondary Market.

Here you can apply more granular selections and choose your investments better; the cons is that you have to spend more time doing so. This is my grid of minimum returns per rating: AA 10%, A 12%, B 17% and C 23%. In addition, I only invest in loans where the borrower made at least 3 payments and are all on time.

This cannot be a long term strategy, because in a normal situation no investor would be willing to sell loans with the above characteristics. My guess is that I can find them now because disgruntled investors hit the ‘no more of this shit’ button and sell all their portfolios, where if you dig deep enough you can find these gems. The moment this flow will stop (sooner now that I shared my strategy with you?) I will simply wait the loans to be repaid and close my Bondora experience.

What I am reading now:

Follow me on Twitter @NProtasoni