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The Cost Of P2P Lending Funds
Costs aren't everything, but history shows that – for investment funds – they're just about the biggest factor that affects your returns in the long run.
We have a few options for investing in P2P lending funds, so let's look at their costs.
Just before we get to the costs
All of the existing funds are investment trusts. This means that you buy shares in the fund, which is listed on the stock market, in order to take part in the fund.
This adds to your complications in buying them, because the share price rising and falling is another dimension to consider.
However, this article isn't about the share price of these funds, its about the costs and fees you pay. For a bit more on how these funds work, see the links at the end of this article.
Fees charged by most funds
This is reasonably normal for a managed fund. Not cheap, but normal.
In practice, this management fees you pay could be more or less. This is because these investment trust invest in other funds, and when they do that they waive their own management fees – but you will be charged a management fee by that other fund.
In addition, P2P Global Investments and VPC Specialty Lending Investments take a whopping 15% annual performance fee for any increase in the share price that is over and above the total (net) value of any P2P loans, cash and other assets in the fund.
Ranger Direct Lending takes a slightly less whopping 10% performance fee.
Since some of your returns are in the rising share price instead of paid out to you from loan interest received, a change in the share price is an important factor for investors.
Yet performance fees are frequently devastating to investors' returns; the steady stream of these high fees, year after year, utterly annihilating the excess gains that clever managers can earn for you.
Higher performance fees, like higher management fees, do not mean better returns. Indeed, perversely, the higher the costs of a fund, the lower your returns – usually!
At least these three funds use a high water mark, which in simple terms means that if the share price plummets and then rises again then you won't pay a performance fee until the fund gets over its previous high.
Fees from GLI Alternative Finance Fund
I just can't seem to pin down the costs for GLI Finance's GLIF Fund anywhere.
However, the same company is launching a new fund, the imaginatively named GLI Alternative Finance Fund, which will focus exclusively on lending to businesses, not individuals.
This will have a lower management fees of 0.75% and no performance fee. That's much more reasonable.
GLI Finance appears to accept that costs are very important, since it is even using these lower costs as a selling point. This is a rare, honest admission from investment fund managers, who generally talk up their fees.
Like all investment funds, the above P2P funds will also have other costs that are hidden in the performance of their shares. These include admin fees, custodian fees, legal and professional fees, research costs and other expenses.
For example, the share price of one of these funds might rise from £1 to £1.15 but, without the hidden costs, it might have risen to £1.17. These hidden costs aren't so easy to spot. Worse, you pay them even if the share price falls.
Also hidden in the performance: these funds will have to pay the P2P lending websites in to lend through them, exactly like you and I do when lending directly.
Most of the time we can't expect these funds to get better deals on costs than we do. (If you think you don't pay anything to lend through P2P, please read There's No Such Thing as “No Lender Fee”.)
Finally, the above fees are in addition to any fees you pay to your stockbroker, pension provider or ISA provider for buying and holding shares in these funds.