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Going forward, Goji will not be issuing any further bonds in order to allow us to focus on our platform technology services. Our Diversified Lending Bond has outperformed our target net return of 5% on all matured bonds to date and performance in our live bonds is also currently above this target. If you have an investment with us we will manage it to maturity and the Investment Management team will continue to focus on outperforming our target return. Please contact us if you have any questions - you can access your account by logging in here

Are advisers truly offering the best diversification?

Posted date: 13 April, 2018 Author: David Beacham
Are advisers truly offering the best diversification?-Goji Direct Lending Investment Experts

Goji’s Head of Distribution, David Beacham, was interviewed by Intelligent Partnership this week. Here’s an overview of the main points:

How has the hunt for uncorrelated assets changed in the past 10 years?

Prior to the global financial crisis, the assumption went that if clients had a mix of equities and bonds in their portfolio they would have something truly diversified. If equities went down bonds provided protection and vice versa.

Then in the market falls of 2008 pretty much all asset classes went down in tandem and investors who thought they were diversified and protected were anything but.

10 years on and one of the great challenges for the investment industry has been to find assets that are truly uncorrelated to each other. It’s been described as the holy grail of investment. As a result many have turned to alternative classes, with property, absolute return and alternative Ucits products all proving popular.

However while these asset classes receive a lot of attention, others can often get ignored, or simply missed. One such asset is direct lending. Despite being a £14bn industry, of which £4bn was accumulated in 2017, it is an area which it could be argued that clients know more about than their financial advisers.

What are the dangers of ignoring Direct Lending?

To date some 200,000 retail investors have invested in the direct lending space, yet few have received traditional advice. Instead the majority have on the back of their own research. However with the number of investors growing at a fast rate, there is a real risk to the adviser community that if they do not at least understand this market they will see more of their clients make their own decisions which they will not be part of advising on.

Part of the reason advisers may not be on board is that they simply don’t understand what direct lending is, and how it can provide diversification. Take the global financial crisis in 2008. At a time when equities, bonds and other asset classes were all falling in tandem, Zopa, one of the largest peer-to-peer lenders which focuses on consumer lending, returned a positive 5%.

As a result investors currently using direct lending, or alternative credit as it also labelled, are using the asset as an alternative cash, but importantly not from a risk perspective. We call it ‘fixed interest plus’. It is an asset that generates income from credit assets (namely loans) which are not directly impacted by changes in market sentiment or pricing like traditional fixed income products, such as bonds.

Such are the uncorrelated benefits of the sector that well established fund managers, such as Neil Woodford, Blackrock, L&G and Aviva, have all been active in the space to provide diversification to their portfolios. However they, like many of the 200,000 already using direct lending, just invest in a handful of loans in one or two sectors, typically consumer or SME lending. The result is there is more exposure to the risk of default and deferral, while at the same time these investments are unregulated.

How has the introduction of the IFISA changed things?

Being unregulated could be a key factor putting off many IFAs from using the sector, but all this changed with the advent of the IFISA. It was a key milestone because being a government endorsed tax wrapper, it gave direct lending a sense of credibility. Our job now is to dispel the myths that exist around the sector and explain the key facets of what it can bring to the end client journey and what it can do for the IFA.

As mentioned, the two key risks in direct lending are the risks of loan default and deferral. In our products we address this in two ways. Firstly we do not invest in the consumer lending space, we only invest in secured lending. The nature of this lending is better quality credit, while the underwriting processes are much more thorough.

Secondly, we do our due diligence. This is an emerging asset class with over 100 peer-to-peer lenders, a lot of which are more risky than others. At the same time the ratings agencies are being slow in embracing this area as they do not know how to assess it from a risk perspective. So we do risk analysis through due diligence, where we mandate a level, or quality of credit, which we are prepared to invest across. To reduce the risks of default we also typically invest across 500 to 1,000 loan parts across a range of sectors, such as SME lending, property lending, asset-backed agricultural lending and education finance.

How else has the sector evolved?

What we are trying to show is that peer-to-peer lending has evolved from just being credit card lenders, such as Wonga, lending to the unbankable. It is an asset which has evolved, become more transparent, and now, most importantly, can be accessed through regulated vehicles.

Our goal now is to support those advisers that are keen to be educated, keen to understand and also admit it may be an area they know less about than their clients at this present juncture. This is important because when you look at where both inflation and deposit rates are, in effect any client in a deposit fund or cash ISA is losing money.

At Goji we believe this new asset class should be considered a small part – no more than 10% – of a client’s overall wealth solution. As such, the question we pose of advisers is that in every piece of advice you rule everything in, before ruling it out – so, is this an asset class you really fully understand?