Alternative investments: FundKo Peer-to-Peer Lending

[Disclaimer: The following is unsolicited investment advice and must not be construed as a recommendation to buy or sell securities. Investors must seek professional legal counsel and invest at their own risk.]

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2 years ago, some of my Facebook friends urged me to invest in a budding concept. Indeed, peer-2-peer platforms, much like their more mainstream counterparts, Uber and Grab were a booming phenomenon. FundKo, the first peer-to-peer lending platform in the country, operates much like Uber and Grab but instead of connecting or brokering drivers and passengers, FundKo connects lenders and borrowers. It's a pretty straightforward and simple enough way of formalizing the 5-6 lending scheme which have existed in the country from time imemorial. 

I may be late to the party, but FundKo could be one of my favorite investment platforms yet. 

The Philippine retail investment scene had always been lacking in one of the most fundamental capital markets: a bond or fixed income exchange for retail or small investors. As they say, business fills in what needs are lacking and FundKo fills in that space between stocks and money market investments.

It's my first time to actually create my very own loan portfolio and I'm quite excited!

And in doing so I will also gain some insights in creating bond/loan portfolios that I will joyfully share with you here. In the 2 years since they started, I figured that the platform already had enough time to iron out the frizzes, streamline its operations and prove the viability of the enterprise.

On January 16, 2018, I made my first deposit to their bank account and within 2 hours of sending the deposit slip, my deposit was credited to my online account. Spell efficiency! I made an ample deposit of P20,000 just to try it out. 

First thing I noticed on the account home page called "Dashboard" was the Marketplace Historical Yield which was around 12-13% percent. This is significant because on average, stock markets return about 12% a year, considering this return is highly volatile and quite frankly much more difficult to achieve.

Lending money or bond investments have always been easier to predict than say fluctuating prices, hence the popularity of bond issues among conservative investors.

I was also glad to see that information regarding the performance of your portfolio was readily available including your loan defaults, monthly cashflows, interest and principal due at the end of the month, and other graphs pertaining to performance.

It takes about a week or so before your invested loans will be fully funded and released. In just a month I would already be receiving some cash flow. Exciting!

The available loans you can invest in are displayed in the "Marketplace", much like the bond market. The FundKo system has assigned their very own loan grading system "based on years of experience in the lending business". However arbitrary, the loan grading system provides another layer of information on the loans your are investing in. There is information about how much the total amount of the loan will be, the duration of the loan, the interest rate, if it is a personal or a business loan, a quick description of the borrower, how long they are employed at their current job or nature of business, and  a checklist on what documents have been presented by the borrower.

Borrowers may lower their interest rate or borrowing cost depending on the proofs, documents, and collateral they present, as well as their credit history or credit worthiness. Most loans however are unsecured meaning, they have no collateral. In case of default, however, FundKo claims to exhaust all reasonable effort to collect the payments from the borrower.

PROS AND CONS:

CONS: In my years as an enthusiast of security analysis, I would say that it would still be difficult to evaluate the risk of each borrower with the information provided. There is no information provided regarding the financial statements, income statement and balance sheet of the borrower entities, which is quite standard in more thorough due diligence and analysis. The 2008 financial crisis has taught us that one may not also depend too much on loan grades since we have no way of knowing how arbitrary these ratings can be.

What investors can afford is the protection of diversification and limiting your exposure by spreading your portfolio across a variety of different loans. In my initial P20,000 investment, I was actually able to spread it to 13 different loans, but you can spread them to as much as 20 loans for a minimum of P1000 placement for each loan. However it is useful to point out what Ben Graham used to say that this sort of diversification only spans one asset class and the entire portfolio is still under the viability of FundKo as a single enterprise. All investments carry a certain degree of risk, and FundKo is no exception. You should only risk what you are willing to lose; limiting your exposure not only to different loans but to the viability of the FundKo's operations itself.

PROS:

A streamlined website interface and transparent portolio data make it easy to see porfolio performance. 

That being said, in my opinion, that by investing through FundKo, investors already get the benefit and free service of screening the borrowers and loans in the Marketplace. This initial screen takes place as FundKo puts in the effort of collecting required proofs and documents for the credit investigation, approve or reject loans, and assign their individual loan ratings and interest rates.

Lastly, I was delighted to discover that in each of the payments, starting from the very first, you already get paid back a portion of your total principal as well as the interest. This dramatically reduces the impact of loan defaults because you start getting back a portion your principal starting on the first payment and decreases the chance of you losing your entire principal in case of a loan default.

This is my favorite advantage because in getting back your principal as soon as possible, that is every month, you already have cash available to invest in more opportunities. Compare that to the opportunity cost of having all of your funds locked up until maturity. By getting back a portion of your funds as soon as possible, you are able to reinvest and compound them more quickly in other loans and investments, even if the first loan is still ongoing. It's almost like multiplying money.

Compound interest is the engine of capitalism and the possibilities of additional returns are endless because of a faster rate of turn-over of money. Compare all this excitement to slower, more linear types of investments with higher barriers to entry and the principal returned only at maturity. Such set ups have consequently lower yields.

FundKo provides retail investors the opportunity and experience of creating their very own loan/bond portfolios, as the country's first peer-to-peer lending platform.

Happy investing!

-PiliFinance