Harbour Asset Management has been cleared to disclose a small parcel of peer-to-peer loans as a single platform holding rather than the full list of underlying borrowers.
In an exemption notice issued last week, the Financial Markets Authority (FMA) approved Harbour’s request to bypass rules requiring fund managers to disclose all portfolio securities every quarter.
Mark Brown, Harbour head of fixed income, said the disclosure rule was difficult to implement in the case of peer-to-peer loans as well as potentially breaching privacy laws.
Harbour invests a tiny percentage of its $90 million Income Fund into peer-to-peer loans issued on the Harmoney platform.
Brown said the fund currently held about $600,000 in roughly 200 underlying Harmoney loans ranging down to individual levels as low as $2,000.
He said Harbour saw the peer-to-peer loan market as another potential diversifier in the search for yield.
And so far – excluding the costs of securing the FMA exemption notice – the Harmoney experiment has paid off.
“There’s been just three defaults from the 200 loans we’ve made on Harmoney,” Brown said.
However, Harbour has focused at the higher-quality end of the Harmoney book, investing only in A- and B-rated loans.
Brown said Harbour also did extensive due diligence on Harmoney before embarking on the peer-to-peer loans including a review of the platform’s credit ranking system and client servicing practices.
“We looked at a couple of other peer-to-peer platforms but Harmoney was the only one with critical mass and a reasonable historical record,” he said. “As investors you want to know the platform will be there in five years time.”
For the time-being, at least, peer-to-peer investments – and direct loans in general – were likely to remain a niche weapon in the fund manager’s arsenal.
But Brown said investors had to look beyond traditional fixed income assets if they wanted to generate above-benchmark yields in a low interest rate era.
The Harbour fund targets a return of 3.5 per cent over local short-term treasuries.
“And you can’t get those returns just by adding corporate bonds [to a sovereign bond portfolio],” he said.
Harbour’s income fund includes an allocation to equities as well as credit investments, like high-yield bonds, and the Harmoney loans.
According to Brown, further loan ‘disintermediation’ could be on the cards as borrowers seek alternative lending channels and banks themselves de-risk – the latter trend possibly to be accelerated by the impending new Reserve Bank of NZ capital rules.
Ultimately, he said NZ fund managers could act as direct lenders to corporates as banks scale back their loan books.
But direct loans need a lot more “hand-holding” than the traditional fixed income securities fund managers deal in, Brown said. For example, direct lenders require more detailed knowledge of loan documentation and processes to handle defaults or ‘work-out’ terms.
“Fund managers typically don’t have those resources,” he said.
Harbour has dabbled in syndicated loans – where banks continue to manage the relationship with the lender but private investors hold the debt – including an Australian windfarm investment.
As the peer-to-peer example shows, new opportunities are opening up for fixed income managers, even if wholesale investors might be reluctant tag along.
“You need a flexible mandate [from wholesale clients] to take on loans,” Brown said.