Funding Circle SME Income fund

The fund prospectus can be found here: www.fcsmeif.com/media/1034/pine-valley-dated-prospectus-121115.pdf , pages 1-15 provide the summary.

The fund's current NAV is £0.98 and share price is £0.9775.  The fund was only recently launched so is still far from being fully invested which will affect initial yield, but they are aiming to pay 0.75p/share in July 16 increasing to 1.5-1.75p/share per quarter thereafter which equals a yield of 6-7%/pa.  Ultimately they aim to employ debt to lever the return to 8-9%pa.  It is effectively an alternative to otherwise investing directly on the platform via autobid or manually.  

The benefits, once the fund is fully invested are:
-it will offer a fully diversified loan portfolio day one
-will probably offer superior liquidity in being able to buy and sell shares on LSE vs individual shares on the SM
-benefit from leverage (although this could obviously amplify losses)
-can be invested in now as part of an isa

The drawbacks being:
-Costs of running the fund (although FC will not charge a management fee, just the usual 1%pa platform fee)
-Bid/ask spread on LSE, currently circa 0.5p ie 0.5% and dealing costs (although no stamp duty as the fund is incorporated offshore)
-Exposure to share price being at a premium/discount to NAV

The Fund buys Whole Loans, ie ones not offered to retail investors, allocated to it at random. This mean it holds different SME loans from those offered on the FC platform. It will include tranches of property loans where other tranches on the same development go to retail lenders as Partial Loans, so that would overlap the exposure for someone also lending directly. It will have to hold its loans to maturity, default or refinancing. Exposure to any one borrower will be no greater than 0.75% of NAV at time of lending.

As these are shares, they are also subject to potential CGT implications. That said, the divideds outside of an ISA could benefit from the divided allowance.

I assume, but don't know, that you might be able to buy them in a SIPP wrapper if you choose to as well.

With IFISA authorisation still a dream, I'm getting fairly desperate to tax-shelter my P2P lending, and am thinking about buying shares in FCIF. I guess the trade-off is that in FCIF you get a random, diversified set of whole loans, while lending on the platform you can try to improve performance by being selective. FCIF is like passive indexing as opposed to active stock-picking. The big advantage is that you can hold units of the fund in an ISA or SIPP. I'm a high-rate taxpayer so this is significant, and I have enough other interest income that my tax-free interest allowance is already used up.

So my thinking is that if I stay on the platform, I would have to be good enough at loan research to raise my returns high enough to cover 40% tax, whereas if I move to buying units of FCIF, I have to accept what the market brings but I don't pay tax. I doubt my loan-picking ability is good enough to close that gap! So I'm really leaning towards buying the fund.

Am I missing something? Are there any other considerations? Are any of you holding units of the fund? I know it's early days yet so there's not much that can be said about performance yet.

Welcome failedtheturingtest ,

I think that you are mostly correct, and I think that you are very unlikely to do better by picking loans yourself by enough to compensate for the tax difference. There are people who do (at least did) but most of us don't.

However, you can put P2P inside a SIPP. I don't know if that is possible with Funding Circle, but some people on this forum have used SippClub which does allow investments in many of the leading P2P platforms. The fees are quite high, you probably need to be investing quite a bit to make it worthwhile. Others have been able to invest with their existing Sipp, but I think that they had a very flexible Sipp. (I haven't invested using a Sipp, my existing sipp is low cost and very restrictive and Sipp club looked expensive last time I considered it, but that might have changed as I noticed that there are more platforms on it now that I like.)

One final thought is that buying shares in FCIF, (or VSL, or P2PGI) is likely to be much less work than using any platform, and will likely outperform autobid on FC which seems to be a poor diversification tool. Manually investing on FC is more time consuming than it should be.

One more final thought is that FCIF and the others invest in US loans as well as UK loans (I think) which might be good or bad depending upon what you want.

Edit Crossed with SteveT.

I think that it is quite likely that the price to NAV will move around, and a 10% discount would be be quite likely. So you need to have 100% cash easily accessible, perhaps 200%. Which impacts your returns a bit. 25%-30% discounts are reasonably common (in investment trusts in general) This one had a discount of ~12% in March.  Be careful or you will turn yourself into Northern Rock!

It is hard to consider it a long term trade as you do need to find the variation margin.

I think that the funding is LIBOR + 2.5% so pretty much 3%. And why is this fund going to yield 8-9% when the loans are randomly allocated and FC has a yield of ~ 7.1%.

Oh and the 10% initial margin is only on the first £2k equivalent position. So if you had £10k it wouldn't seem sensible to buy much more than £20k (£6k3 initial margin and £3k7 for variation), which gives a return of about 8.5%. The anticipated return is better for smaller amounts. There are probably more liquid investments which have a lower margin requirements. For example, and this is just an example - I'm not suggesting it, the iShares IBOXX $ High Yield has a 10% margin up to $240,000.