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Since the financial crisis, pension funds have been de-risking their portfolios and moving out of equities and into assets, like Direct Lending, that better match their liabilities. These funds have been re-allocating away from lower-yielding fixed income or volatile equities.
“What we have tended to see clients do is reduce allocations to investment-grade (fixed income) and equities to make a risk neutral move into…direct lending,” said Gregg Disdale head of illiquid credit at consultancy Willis Towers Watson. “Credit is safer than the rollercoaster ride of the equity markets and in the end, pension funds will most probably get the same returns. The returns from direct lending are basically just as good as equity.”
Whilst pension schemes have been allocating between 5%-10% of their portfolios*, retail investors have so far made only small investments in the direct lending asset class through their Innovative Finance ISA. So if big institutional investors are doing it, why aren’t advised retail investors, utilising professional financial advisers, doing the same?
Since April 2016, investors have been able to invest in Direct Lending products (P2P lending and crowd bonds) tax free through an Innovative Finance ISA – the latest manifestation of the established retail investment tax wrapper. But whilst the IFISA has soared in popularity, with about £300m held in IFISAs by April 2018, investing in Direct Lending through SIPPs has remained difficult, despite Pension Freedoms in 2014. There are few direct lending products in the market that have been designed specifically for inclusion in pensions and because of the more onerous tax provision that apply to SIPPs fewer providers have entered the market.
There are a number of reasons for this, including the risks to SIPP managers if investors accidentally lend to themselves or if they end up investing in ‘taxable’ property (like UK residential housing). The other major reason is that SIPP managers need more regulatory capital if they allow investors to hold P2P and crowd bonds which ultimately means higher costs for investors.
All of these well intentioned challenges have essentially relegated these investments into the ‘too difficult’ bucket for many of the less innovative SIPP managers or too expensive for investors, despite soaring popularity amongst retail investors.
The difficulty this creates is that an increasing number of investors and advisers are using these products to shelter investments from market volatility and escape low rates on cash deposits or to add diversification to their portfolios. Such low volatility income is especially popular amongst older investors, not to mention the positive impact such lending has on UK plc by providing finance to parts of the economy abandoned by many of the banks.
The Goji SIPP
Goji has launched a low cost SIPP designed to give investors access to the Direct Lending sector through a robustly regulated pension and product structure with fully regulated counter parties.
We have done this because we passionately believe (and scores of advisers who we work with across the country agree with us), that Direct Lending is well suited to pension investments. In our view pension investors should have access to this asset class and Goji’s products provide an attractive risk adjusted method to do so.
Goji’s Renewables Lending and Diversified Lending Bonds, provide attractive (5%-7.5%*) returns that are greater than traditional fixed income returns, and not far off historical average equity returns, making them well placed to help investors in the accumulation stage.
Goji’s products also incur very low levels of volatility and correlation to mainstream assets which means they are well suited to investors who are in decumulation – including the low volatility, low correlation assets helps to improve the efficient investment frontier and improve the longevity of clients’ portfolios.
8 Reasons to invest in Direct Lending through a SIPP
– Portfolio level – Direct Lending investments behave differently to other investments such as corporate bonds. The table below shows how it correlates to mainstream assets held in a typical portfolio.
– Asset level – individual loan parts are available across different lending sectors and a variety of platforms.
6. Lending should prove resilient through economic cycles: Hymans Robertson, a City-based actuarial firm, stress-tested a major Direct Lender’s loan book in the event of an economic downturn. Taking into consideration hundreds of thousands of loans and many credit scenarios, the net return to investors remained above 5% when using PRA stress testing scenarios.
7. It can enhance the longevity of portfolios: The low volatility, and steady returns, of Direct Lending investments helps to support greater longevity of portfolios in drawdown compared to more volatile portfolios.
8. Flexibility: Since Goji’s products offer monthly liquidity, investors may be able to access their capital (or a portion of it) if they require it for a flexible or regular drawdown payment.
How to open and fund a Goji SIPP
Opening a SIPP with Goji couldn’t be simpler – as digital technology is core to our DNA the entire process is automated for both investors and advisers.
A Goji SIPP can be opened directly through the Goji Platform and managed by financial advisers and para-planners through the Platform. Clients and advisers can then monitor SIPP investments through their client or adviser portal.
Clients can contribute to the Goji SIPP by either making a one-off payment or by transferring pension benefits from other suitable pension arrangements.