In short, BondMason acts as a peer to peer investment manager, for a 1% fee of invested capital. They handpick each loan from a range of third party platforms and investment opportunities. To reduce risk, they conduct due diligence firstly on the lending platforms themselves and then later on individual loans. As far as I can tell they invest in around 18 different platforms*, and of these select the best 1/3rd of the loans. They also source loans from selected primary lenders.

Article first written 12th October 2016, last updated 24th January 2017

Key Facts:

Expected Returns: Target 7% per annum after fees.
Provision Fund: No
Sell Out: Yes, more details below.
Minimum Investment: £1,000
Cashback: None, but they will donate £15 to charity if you are invited via a friend (Kiva).
Speed of Investment: Average
Innovative Finance ISA: Not yet

Bond Mason Review:

There’s 3 main reasons to use a peer to peer investment service like BondMason:

1. Automated Investment. As BondMason manages everything for you, you don’t have the hassle of manually investing in new loans, carrying out your own due diligence, logging on at X’oclock to each site and continuously F5’ing the page to get a piece of the latest loan.
2. Diversification. They automatically split your lump sum deposit into many different loan parts, across different sectors, loan types and platforms. In my settings I have an option to set my preferred investment concentration to either 1% or 2%. So, on a minimum £1,000 investment I could have 100 chunks of £10 loans. When I look down my list of current investments I have property bridging loans, invoice discounting, working capital, refinance and residential property development. Many of these third party platforms may have high minimum investment amounts (e.g. ThinCats, THC minimum £1,000 per loan) that would otherwise require a large total investment to be adequately diversified. To use an example directly from Bond Mason, one of their platforms has a massive £250,000 minimum investment (read more).
3. Loan Quality. You would expect that their loan selection beats returns by amateur peer to peer investors. For one, their loan selection team ‘has 50 years of experience’ investing ‘over £2bn’. Secondly, as they invest larger sums they have opportunities not open to retail investors and may receive high investment bonuses. I’ve noticed that on certain platforms like Funding Secure or The House Crowd, they often offer up to 3% higher rates for investments of say £15k+. I imagine that Bond Mason are benefiting from similar arrangements.

Does BondMason have a protection/provision fund?

No, they don’t have a protection fund/ provision fund. However, they have one of the most well written arguments against a provision fund that I’ve read:

We understand that [provision funds] may be helpful marketing tools, but the underlying economics simply aren’t attractive to a well diversified investor (in our opinion). Considering the three possible outcomes:

1. The Protection fund is set at exactly the right level, at which point it effectively crystallises the loss ratio up-front, impacting IRR;
2. The Protection fund is too big, in which case the loss ratio is over-accounted for, dampening returns;
3. The Protection fund is too small, in which case the investor is exposed to losses anyway, which could also result in platform failure, and the IRR has been reduced.

Put simply, in some cases a provision fund may protect you from some capital losses, but in almost every case this protection will be outweighed by how much you have to sacrifice your return. For a well diversified portfolio, as long as you recognise you are likely to incur some losses against the attractive interest rates received, then you shouldn’t want, or need, a protection fund.

How Does Platform Risk Compare?

When investing in peer to peer loans you have both the risk of borrower default and also the risk that the lending platform itself runs into problems. As mentioned above, BondMason reduces individual default risk by spreading your capital widely among many loans. However, what about the risk from investing in the BondMason platform itself? Does it not just add an extra layer of risk to invest via an intermediary?

Well, the first thing to check is how they handle uninvested money. This is segregated into a client bank account with Barclays and ring-fenced with FSCS protection. This practice is common with other platforms I’ve researched and I imagine is an ask from the FCA. On invested funds, they say:

From there [the Barclays account], your money is used to purchase loan investments. Each investment is given a unique reference code in our transaction database; and these records are backed up in four different locations. You can see a summary of your investments on your dashboard at any time.

When you go to your dashboard you can see a list of all your investments with the unique reference code they mention:

However, quite annoyingly, you can’t export this as a .csv or .xlsx for your own records. The best work around I can recommend for your personal backup is to print off the page itself, or to download a browser plugin that lets you save it as a pdf. If you try to ‘CTRL+A’, ‘CTRL+C’ on your keyboard to copy all, and paste into your spreadsheet with ‘CTRL-V’ it only half works. In the spreadsheet you now have a number of excess rows and columns that cannot just be deleted (they float on top), so you have to then re-copy the investment table to a new sheet and delete the old one. You’ve also lost the details on the borrower, investment status (so you can’t see whats active) and asset security that were images.

Most importantly, what happens if BondMason goes bust? In their FAQ’s they state:

BondMason has a “living will” procedure; which means that a third party will step in, and manage out all remaining client positions and funds. Ensuring client funds are returned as underlying loans are repaid.

I tried to find an exact definition of what a living will procedure means for a financial company. The best I found was this US based explanation for banks:

A bank’s living will is similar to a prepackaged bankruptcy plan. But unlike other businesses, regardless of a systemically important bank’s health, it is required to generate one for regulators. The living will details a contingency plan for how the bank will sell off assets or be liquidated in a manner that does not generate chaotic aftershocks elsewhere in the financial system.

So it seems that in the case of corporate failure of BondMason itself a third party would just run down the loan book and repay funds. As you have the specific ID for each loan part you own, you would hope this would be a straight forward process. It would be nice to have a clear explanation as to who this third party is and if they would charge any fees for their management of the administration process.

How Do The 7% Returns Compare?

There is a target of 7% but historically this has been higher: they “have delivered a net return of 7.93% p.a. to investors since April 2015”. It is hard to compare BondMason as they are pretty unique in that they actively select the best loans on your behalf, so the advantages may only be fully understood in an economic downturn or with some external shock to the peer-to-peer lending industry. In recent analysis done by Funding Circle, they found that a recession similar to 2008 would reduce their expected rates on new loans from 7.2% to 5.8%, or an extreme recession to as low as 3.9%. Would BondMason’s ongoing selection and expertise minimise a potential downside?

There are a number of platforms offering 10%+ returns such as MoneyThing or Funding Secure but these are high risk and I don’t feel its fair to compare them directly. Probably a more reasonable comparison would be the 7% returns of the GBBA account with Assetz Capital. This is an automatically invested product from a relatively well established platform with a protection fund with a 3x expected loss multiple. In the long term it comes down to how much you trust the experience of the BondMason expertise to give a good balance between risk and return.

My Experience With BondMason

I joined BondMason last July, so have been with them around 3 months. So far I’ve been really happy with their customer support. My questions over email have been answered directly by the founder, Stephen Findlay, and I’ve seen him actively engaging with others on forums too.

Once you’re up and running with invested funds you have a nice looking investment dashboard:

The current return of 8.53% above is after third party platform fees before the 1% adminstration fee of actively managed funds is taken out. I’ve covered up some private details above in blue. You manage your investment settings very simply:

This is the only input possible for you to tweak: auto investment/reinvestment settings and a preferred investment concentration that can be either 1% or 2%. It would be good to have more control here. I would love to be able to avoid investing platforms that I already manually invest in, or chose certain types of loans, or opt to no invest in loans paying a return of below a certain percentage. However, BondMason obviously want to keep things as simple as possible at this stage.

Clicking on the ‘Your Investments’ button on the left gives you this:

It shows you a list of your current and previous invesments. There is not a great transparency as to what you are actually investing in: all it says is the loan purpose. To give you an idea of the bredth of investments, in my investment history these purposes have been:

• Bridging Loan
• Property Bridging
• Property Development
• Invoice Discounting
• Working Capital
• Business Expansion
• Refinance
• Residential Property Development
• Refinancing Property development
• Refinancing
• Commercial Property Development
• Share Repurchase
• Business Property Development
• Asset Purchase

The vast majority are secured bullet loans. Gross rates of return for me have been between 5.5% and 15.4%.

You can view an overview of your returns with clear balance and return statements on your summary page:

Speed Of Lending (Cash Drag)

Last August (2016) Bond Mason implemented an algorithm change which redistributes larger loans from big investors down to smaller ones. This dramatically decreases the waiting time for those with smaller amounts (source):

in trials it has reduced allocation periods for smaller investors, less than £5-10K, from 4 weeks to c.2-3 days

I can only comment on my personal experience as a smaller investor, but after this change my capital has been invested really quickly and never dropped below 96% fully invested. Bond Mason predict cash drag between 92% and 98%, with waiting times of 7-28 days at the start and 1-3 day waits for reinvestment

The Negatives & Why I’m Liquidating My Investment

The first mistake that new investors might make is to assume that the 1% fee is tax deductible, so a 40% tax payer would pay (8%-1%) x 40% tax. However from what I can find this is not the case. BondMason mentioned on a forum (see post):

Tax: the fee is an admin fee.  The tax treatment depends on your position (and we can’t give tax advice). Generally, Clients that invest on a personal basis aren’t able to deduct the 1%; however Clients that invest through a limited company vehicles may be able to offset the fee.

So, this means that the expected tax for a 40% payer over their tax free allowance would be (8% x 40%) rather than (7% x 40%). In other words this could mean 14.3% more tax than you might expect. However, if you do compare this to other peers like Hargreaves Lansdown etc, their fees aren’t tax deductible either.

Secondly, one thing I can’t intuitively understand is why Bond Mason invests in loans with rates under 8% if their target is 7% to investors after fees. In their explanatory page on rates and fees, they explain that they typically invest on loans from 6% to 12.5% and presumably their risk/reward calculations then give an overall return from this of 8% before fees, 7% after fees. In my data of the 64 loans I was invested in over the last 3 months, 34% were under 8% gross return and one was as low as 5.5%. So for a third of my portfolio, even with a miraculous 0% risk of default they still return under the target. This is even before considering cash drag, which at an average of 95% investment rate over time would require a 8.37% gross return by my maths to give a net of 7%. As you may have noticed in my screenshot at the top of the review, my current return was 8.53%, which doesn’t give a lot of room for bad debt. Bond Mason do publish (quite interesting) statistics here, which include a bar chart with the proportion of loans at each rate of return. This data seems to suggest I may have been unlucky in my assignment of loan-parts, and that overall only about 13% of loans are at 6% or 7%, as opposed to the 34% that I had.

What finally lead me to sell out however was that, in my case, my actual returns just didn’t tally up with my own calculations. Before I explain, I want to mention that from correspondence with Bond Mason I trust that everything was done properly on their side and this problem may just affect the smallest investors (I have just £10 and £20 loan parts).

Back in August I did a simple check across a couple of weeks. I took a start and finish snapshot of my dashboard, the amount invested and what interest I earned. Over that short period, net return was lower than expected and fees were higher (fees were 19% of gross returns). I let Bond Mason know via email and they replied:

Each day we look at how much interest you are due on each loan. If it is less than 1.0p then it is round down to 0.0p. However, we make a note of the amount that has been deferred due to rounding, and as soon as you get to 1.0p, then you get that 1.0p.  I.e. if you are due to earn 0.1p per day on an investment, then the first 9 days you’ll get 0.0p and on day 10 you’ll get 1.0p.  Rounding “washes” through over time, but if you look at a small(er) amount invested – i.e. £500 over a small time period (less than 4 weeks) then rounding will have an impact.

Fair enough, I have a small amount invested and it should just take another 4 weeks or so to balance out, right?

Taking a snapshot between then and now, around 7 and a half weeks later, and doing calculations on the delta amounts:

• Annualised Gross Returns = 7.2%
• Annualised Fees = 1.45%
• Annualised Net Returns = 5.76%
• Fees divided by Gross Return = 20.6% (You would expect this to be 11.5% based on my typical 8.7% gross return)

So from my perspective looking at my returns statement it appears they are rounding up fees and rounding down interest payments. This may be fine if you have bigger amounts invested but in my case it was not good enough.

Update: 11th Jan 2017, Bond Mason tell me that this calculation has been updated so that fees are now rounded down.

Selling Out

To liquidate your investments and withdraw money you go to ‘My Summary’, ‘Withdraw’:

Although it says here that it takes up to 28 days to liquidate assets, on their ‘liquidity’ page it has a breakdown of expected sell out times:

• Up to £5k invested: same day liquidity
• Up to £10k invested: liquidity in 2-3 days
• Up to £25k invested: liquidity in 3-7 days
• Up to £50k invested: liquidity in 7-14 days
• £50k-100k: liquidity in c.10-21 days
• Over £100k: please contact us

Then there is the bank transfer time that is usually 2-3 days. In my case I liquidated just under £500 so from this I was expecting it to be quick:

Day 1: Liquidated around £500 and withdrew un-invested funds. Cash withdrawal very fast and in bank the same day.
Day 2: 2% of loans have been sold, 98% remaining
Day 3: Loans liquidated and account closed.

Overall View: Summary of BondMason

What you get with BondMason is a professional investment service, with great customer service and expertise in lending. You can take advantage of investment opportunities not available to other retail peer to peer investors, and diversify widely with no effort all. Before considering tax, you’ll probably get 7% returns or more, and you would hope that the skills of the team will select loans that minimise losses in a economic downturn.

However for me, I like to have a bit more control and I’m willing to do more work myself. I don’t like that in my case as a small investor (£500-£1,000) the numbers don’t quite add up due to rounding down returns (and presumably rounding up fees). Finally, it is worth noting the tax implications of the 1% fee for private investors on the higher tax bands.

 

*The figure of 18 different platforms is inferred: here they say there are 75+ different platforms in the UK, and separately they say they invest in 1 in 4 UK platforms.

 

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