Turning debt into income is easier as new investment models multiply

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PROFITING from other people’s debts has always been popular way to make money, and investors seeking income are being given more choice than ever before.

While interest rates wallow at record lows and are tipped to fall further, a new breed of peer-to-peer or marketplace lenders is gaining ground and other income funds are multiplying.

Peer-to-peer lending which removes middlemen such as banks and allows people to lend directly to borrowers via online platforms is forecast to at least double in size every year for several years to come.

RateSetter CEO Daniel Foggo says Australian peer-to-peer platforms funded $50 million of loans last year and that is expected to grow to $200 million this year.

MEASURED RISK

Peer-to-peer is riskier than bank deposits but nowhere near as volatile as the sharemarket. Lenders usually have provision funds to protect investors from bad debts.

Investors normally fund lots of different loans. In RateSetters history, including the UK where we have funded more than 1.2 billion pounds of loans, every investor has got every amount of interest and principal due to them, Foggo says.

Lenders can earn over 9.7 per cent per annum in RateSetters five-year lending market, down to around 4 per cent in its one-month lending market.

Foggo says RateSetter is the only traditional peer-to-peer lending platform available to Australian retail investors. Other platforms such as SocietyOne and MoneyPlace source their money from wholesale investors such as super funds, banks and wealthy individuals.

SocietyOne spokesman Danny John said his firm, part-owned by News Corp and James Packer, was actively considering offering loans to retail investors but there were no immediate plans.

We have witnessed strong growth over the past year we hit $100 million of approved loans in early April, which was also our best month of lending, John says. What we are seeing is that our customers are seeing real financial benefits as both borrower and investor funder customers.

POOLING YOUR MONEY

Listed company DirectMoney also promotes a marketplace lending model and investors access its loans through its DirectMoney Personal Loan Income Fund.

The DirectMoney fund offers investors a pooled investment approach where returns and the risk of any one loan default are spread over the funds entire portfolio, says DirectMoney founder David Doust.

The funds minimum investment amount is $10,000 and its first full year of performance delivered investors 7.76 per cent after fees and provisions.

Traditionally income funds focused government treasury bonds, but there has been strong growth in higher-return corporate bond funds that spread the risk among several companies.

Fund manager Vanguard last week launched a new exchange-traded fund that offers access to debt from about 260 investment-grade companies in Australia and overseas, while iShares offers half a dozen fixed income ETFs.

Compared to other countries, Australian investors have a bias to equities and are relatively underweight in fixed income, says Jon Howie, the head of iShares Australia.

Doust warns that when interest rates start to rise, the holders of bonds will suffer capital losses.

Hybrid securities, a mix between debt and equity, are issued by many big companies including the banks and are popular with income investors.

The latest hybrid to be issued, Westpac Capital Notes 4, is promising to pay investors a margin of around 5 per cent above the bank bill rate, which is a total franked yield of nearly 7 per cent, Doust says.

But hybrids have their own risks Investors should take advice from an independent adviser regarding their appropriate diversification.