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The Maseco Asset Management Limited website is intended for use only by knowledgeable and experienced investors who meet certain criteria.

Maseco Asset Management Limited (MAM), a limited company incorporated in the British Virgin Islands under number 1893498, approved as an investment manager by the British Virgin Islands Financial Services Commission.  Certificate No. IBR/AIM/16/0132.

A “knowledgeable and experienced” investor could be an institutional investor, a professional investor or in the case of a retail investor an investor with sufficient knowledge and investment experience.

UK Resident Investors – Certified High Net-worth Investor Statement

You have throughout the financial year immediately preceding the date below had an annual income of £100,000 or more or held throughout the financial year immediately preceding the date below, net assets to the value of £250,000 or more.

Net assets for these purposes do not include the property which is your primary residence or any money raised through a loan secured on that property; any rights of yours under a qualifying contract of insurance; or any benefits (in the form of pensions or otherwise) which are payable on the termination of your service or on your death or retirement and to which you (or your dependants are), or may be, entitled.

You accept that the investments to which the promotions will relate may expose you to a significant risk of losing all of the money or other property invested.  That you are aware that it is open to you to seek advice from an authorised person who specialises in advising on non-mainstream pooled investments.






US Resident Investor – Accredited Investor Statement

As a US citizen you are an Accredited Investor as one of the following applies, you either have individual Income in excess of $200,000 in each of the last two calendar years or joint Income with a spouse in excess of $300,000 in each of the last two calendar years and reasonably expects to attain levels of Income this year at least equal to these amounts.[1] Or you have, and at the time of any purchase of securities of the Investment will have, an individual Net Worth, or the spouse and the investor currently has, and at the time of any purchase of securities of the Investment will have, a combined Net Worth in excess of $1,000,000.[2]

You accept that the investments to which the promotions will relate may expose you to a significant risk of losing all of the money or other property invested.  You are aware that it is open to you to seek independent advice.

Risk Warning

You should refer to the Prospectus, an Adviser and a Tax Specialist in each case before making any decision to invest in either of MAM’s Alternative Credit Funds.

Past performance is not an indicator of future results.  Currency fluctuations may increase or decrease the returns of any investment.  The value of investments can fall as well as rise; you may not get back what you invest.  The funds have limited liquidity and so you should expect not always to receive back your capital in a timely manner, during this time the fund value may fall as well as rise.

Acceptance

By accepting these statements you confirm you have read, understood and you meet the conditions of the relevant category of investor.

1 Income means adjusted gross income, as reported for federal income tax purposes, increased by the following amounts: (i) the amount of any tax exempt interest income received; (ii) the amount of losses claimed as a limited partner in a limited partnership; (iii) any deduction claimed for depletion; (iv) amounts contributed to an IRA or Keogh retirement plan; (v) alimony paid; and (vi) any amount by which income from long-term capital gains has been reduced in arriving at adjusted gross income pursuant to the provisions of Section 1202 of the Internal Revenue Code.

2 Net Worth is the amount by which your total assets at fair market value exceed your total liabilities, with the following adjustments:

(i) the estimated fair market value of your primary residence is excluded from your total assets; (ii) the amount of any indebtedness secured by your primary residence up to the fair market value of such residence is not treated as a liability; (iii) the amount of any indebtedness secured by your primary residence that exceeds the fair market value of your primary residence is treated as a liability; and (iv) the amount of any debt secured by your primary residence incurred during the 60 days immediately preceding your purchase of any securities of the Company is treated as a liability (even if the estimated fair market value of your primary residence exceeds the aggregate amount of indebtedness secured by such primary residence), unless such debt resulted from the purchase of your primary residence during such 60 day period.

Josh Matthews
Josh Matthews
Josh is a Managing Partner and co-founder of MASECO Private Wealth. In 2008, he co-founded MASECO Private Wealth in the UK, followed in subsequent years by MASECO Switzerland and MASECO Asia in Hong Kong. Josh is also a seasoned expert in Alternative Credit and is the architect of the MASECO Asset Management multi-strategy Alternative Credit Fund.

josh.matthews@masecopw.com

Back to opinions
January 25, 2017
Josh Matthews

How to Diversify your Alternative Credit Portfolio

Diversification is one of the most important aspects when investing and this is no exception in Alternative Credit.  Diversifying your investments in Alternative Credit is a lot harder to achieve than in many other more liquid and mature asset classes.   Here are some ways in which you can achieve this.

As I wrote in an earlier article1, since the GFC, interest rates across the developed world have been low much longer than expected.  Since then there have been many regulatory and business changes and investors need to look further afield in search of yield.  Alternative Credit has been quietly filling that void for some investors for many years and is now just starting to hit the mainstream.  Nowadays it is easy to get access to P2P consumer loans through Lending Club, RateSetter, Zopa or other platforms and it is easy to diversify lending across multiple loans in small amounts.  But how much does this really reduce risk?  We all know from Harry Markowitz that diversification is one of the only free lunches in investing and that investing in non-correlated investments can reduce risk.  This second point is where many alternative credit investors fail.

It is easy for investors to diversify out their ‘loan specific risk’ by making hundreds of loans on a platform as opposed to a small handful.  The P2P consumer lending platforms have been very good at helping investors do this over the past number of years.  That is a good first step, but it is not enough.  What happens if the lending standards on a platform drop significantly or there is fraud or some other unanticipated event?

Lending out money on multiple P2P consumer lending platforms reduces ‘platform risk’ which is sensible but still not enough.  Investors who are trying to spread their risk by making P2P consumer loans on multiple platforms still have too much risk in one asset class.  I saw a similar situation occur in the late 90’s when I was managing stock option plans at Smith Barney in New York.  We had employees who would reduce their ‘company specific risk’ (which is akin to ‘platform risk’) by selling their Cisco stock options but then using the proceeds to buy shares in Lucent or Nortel.  This failed when all networking and technology stocks fell significantly at the same time.  In Brinson, Singer and Beebower’s research papers on asset allocation from the 1980’s, they confirmed that the decision about which asset class to invest in is more important than the individual stocks you buy.  They showed us that asset allocation is many times more important than stock picking or market timing, which is also true in alternative credit.  What happens if all unsecured consumer P2P loans start to default because of a macro or micro economic event?  This would lead to big losses, like when many sub-prime mortgages started to default at the same time less than 10 years ago.

Another problem many alternative credit investors encounter is that most only lend in their own country.  This is known as ‘home country bias and concentrates risk in one currency, political environment, regulatory environment, market environment, etc.  Investing in multiple countries will diversify away many of these and other unexpected risks.  The problem is that most individual investors cannot access foreign lending markets due to tax, regulatory or practical issues such as getting access to loans from abroad.

That being said, applying sensible portfolio management techniques, I have taken a very different approach both personally and with clients when investing in alternative credit.  In order to be successful, it is my opinion that you need to be able to make many loans in many asset classes, through many platforms (or directly) and in multiple countries.  MASECO Asset Management has investigated many global opportunities and at the moment, invests in commercial mortgages, loans against life insurance, trade finance loans, leasing, loans to SMEs and P2P consumer loans (although they are not making new loans in this area) in more than 12 countries on 3 continents.  As you can see there should be very little correlation between trade finance loans in South Africa, SME loans in the US, leasing in Spain, loans against life in the US and real estate loans in Canada.  But why is this?

The drivers behind the lending rates and default rates in these different investments is what gives us confidence that they will have low correlation when (not if) one of these market segments falters.  For example, regional and large banks in the US have decreased their SME lending dramatically since the GFC and the platforms have increased their footprint significantly over this period.  Based on my experience, net returns in the US are higher than in the many European countries and the UK in this asset class.  For our US investors we invest in USD in this market segment and for GBP investors we simply hedge out the foreign exchange risk for them.

In South Africa, big banks have stopped writing letters of credit to many former clients and private capital can now enjoy a very health premium for lending in this space.  As Barclays and Standard Bank retrench whilst many African economies continue to grow at very healthy rates, the demand for capital has increased and the supply decreased.  Letters of credit default rates in Africa are actually much lower than in Europe (according to the ICC), yet the rate of interest lenders can charge is much higher.

Customer Default Rates Across Regions and Produce

Customer Default Rates

Source: International Chamber of Commerce (ICC), “Rethinking Trade & Finance”, 2015

In Canada there are only five big banks and they dominate the banking landscape.  If a borrower cannot meet their strict criteria they won’t lend to them.  This has created a large opportunity for clever borrowers to make a decent return.  This has been going on for decades and I suspect it will for many more.

Loans against life insurance is also an underserved community where you can enjoy healthy lending premiums.  Many lenders cannot accept the unknown duration of these loans so they cannot hedge out their duration risk.  Private capital who doesn’t mind having a portion of their assets in illiquid, loans with unknown duration can receive double digit returns whilst maintaining a high credit quality portfolio.

So as you can see, in order to diversify in alternative credit, it is important to diversify to significantly reduce your risk whilst seeking a high level of return.  By investing in thousands of loans from multiple platforms, across multiple asset classes in multiple countries, an investor can diversify out many risks and sleep better at night while receiving a healthy income.

Josh Matthews is the co-founder of MASECO LLP in London.  Josh is also the Fund Architect of MASECO Asset Management’s two Alternative Credit Funds.  Prior to co-founding MASECO LLP, Josh was a Director in Citigroup’s Private Client Group in London and a Senior Vice President at the predecessor firm Salomon Smith Barney in New York City.  Josh is a UK Founding Member of B Corp and MASECO Private Wealth was the first financial services company in the UK to become a B Corp.

MASECO Asset Management Limited is a separate and independent entity from MASECO LLP and any other entity of a similar name.

1. Why the opportunity in alternative credit is far broader than just p2p.