Thoughts

P2P financing update

Dear Readers

In my last article, Who’s afraid of P2P financing?, I shared about my initial experience of P2P financing through Funding Societies Malaysia. So, if you haven’t read Who’s afraid of P2P financing?, I strongly suggest you give it a go.

lending-01-5
Credit Yourstory.com

Now, not everyone has the appetite for the volatility of equity investment (shares investing), and its derivatives. But, at the same time, I am sure most of us are seeking other investments which may yield better returns than conservative investments such as fixed deposit and bonds. This is because we are living in a low interest rate environment ever since the last global financial crisis in 2008. Interest rate in Malaysia, although higher than most developed economies such as Japan, USA and Europe, has remained stagnated since 2008. Low interest rates couple with higher inflation will see your hard-earned savings slowly diminishing, in terms of purchasing power.

Between 2008 and 2016, fixed deposit in Malaysia,  on average, yields a measly 2.85%.

deposit rate malaysia

Exacerbated by a rising inflation rate since the beginning of 2017, which has been hovering around 4% mark and hit a high of 5% in March 2017, higher inflation rate may have nudged us to look elsewhere for higher yields other than the low return generated by fixed deposits.

As for me, I only maintain a minimum amount in fixed deposit for a rainy day. My logic is simple; putting too much money in cash is not going to benefit me in the long run.  In fact, it may be detrimental. Hence, this is where P2P financing comes into the picture as it provides an opportunity to achieve a balance between a manageable risk and considerable return.

So, let’s get down to it.

What is your experience of P2P financing with Funding Societies Malaysia?

I am pleased to report that I have received my first monthly return from a crowdfunding which began in May 2017. I have made an initial test investment of RM1,000.00 in a crowdfunding exercise which raised RM1 mil for a small and medium-sized enterprise (“SME“). I did this after satisfying myself of the viability of the venture by carefully reading the investment fact sheet provided by Funding Societies Malaysia (think of it like a product disclosure statement).

Funding Societies Malaysia also performs stringent due diligence and credit assessments to sift out SME with bad creditworthiness – like how any banks would conduct themselves before approving a financing facility.

In this particular crowdfunding exercise, the investment tenure is for 6 months with an interest rate of 10% per annum. That is effectively, 5% interest over the course of 6 months (excluding service fee). Some crowdfunding exercise may yield up to 16% per annum (even after deducting service fee).

Screenshot_20170717-222827

So for July 2017, I received RM174.99 from the investment, of which, RM166.66 is principal and RM8.33 is the interest (or the yield). RM1.74 (or 1% of investment) is deducted from RM174.99, as service fee for Funding Societies Malaysia, thus leaving me with a balance of RM173.25.

A thing which I am particularly fond about P2P financing is that the money received from the instalment repayments can be reinvested, in another crowdfunding exercise, as soon as it is made available to me. In other words, if there is an available crowdfunding exercise (there are about 2-3 crowdfunding exercises per month on average), I can reinvest my balance of RM173.25 through Funding Societies Malaysia. Hence, I am constantly generating income, as I should, because inflation never sleeps.

In my case, a yield of 10% per annual (excluding service fee) is handsome and definitely ample to tackle a rising inflation.

How would you rank P2P financing against fixed deposits and bonds in terms of yield?

Because P2P financing via Funding Societies Malaysia could potentially yield up to 16% of interest per annum (after deducting service fee), it has a return which is much higher than that of fixed deposits and most investment grade bonds (the AAA or AA-rated bonds).

See, by taking on an acceptable risk, you could be in a position to potentially receive a yield of about 4-5 times higher than that of the yield from a fixed deposit.

How does P2P financing stack up against investment in the share market (equity)?

P2P financing is an investment in debt as oppose to an investment in shares (equity). Hence, it has zero correlation with the performance of the share market. In spite of that, the yield from P2P financing is comparable with the yield from investing in the share market, which averages to about 7-10% per annum, in the long run.

Furthermore, P2P investing is definitely a suitable investment for those who cannot stomach the volatility of the stock market (like my mum) or for those looking to balance their portfolio with some high-yield debt investing (like me).

As an investor, I can truly appreciate the element of certainty of the return from P2P financing. For example, I know beforehand the return of investment which I will be getting from the get-go.

Conclusion

P2P financing is definitely a strong contender to other conservative investment such as cash or bonds. On the other hand, equity investors could also benefit from a high-yield diversification into P2P financing.

Like any other investments, the element of risk is inevitable and should be accepted as part and parcel of investing. With proper risk management, the risks involved in P2P financing can be greatly reduced.

In my next write-up about P2P financing, I will share some considerations which I personally make before investing in a particular crowdfunding exercise. Such consideration is part of my risk management strategy which I hope will be useful to you.

So how do you find P2P financing? Do drop me a comment.

Until then.

Helpful links

Click the link if you would like to know more about Funding Societies Malaysia.

Click on this special LINK should you would wish to sign up and create an investor’s account with Funding Societies Malaysia.

If you find this write-up helpful, please hit that like and share buttons on my Facebook for more updates and analysis.

Thoughts

Stock watchlist

Dear Readers

It’s almost the end of June. What an interesting month on Bursa. Market volatility started warming up after the Trump-Comey scandal; another Watergate in the making which will unlikely result in an impeachment.

After that, the market got hit when the Feds decided to hike interest rate. Even though this was expected, the effects of such rate hike has dented the mood on Bursa. There is a likelihood that foreign funds may decrease their exposure in the Malaysian equity market.

However, let’s not be swayed by things which are out of our control. Remember, the Malaysian economy is doing fine and if you are investing in a company with good fundamentals, there is nothing which you should be concerned about.

This brings up to the purpose of this write-up. There are companies which are fundamentally sound but are suffering minor hiccups every now and then either because their earnings are below market’s expectation, their businesses are affected by external factors i.e. hike in prices of commodities, purely market sentiment or a combination of all or any of the said factors. Yet nothing has changed, at the core of their businesses, which warrants concerns.

cropped-derivative-analysis

Today, we will look into 4 companies which have fallen out of favour by the market in recent time. This is not a recommendation, or anything of that sort, to be acted upon. Treat this write-up as an idea and rely on your own research.

  1. Maxis. From a high of RM6.60 in May and to a low of RM5.60; that translates to a 17% discount on Maxis Bhd’s share price. Partly to be blamed is a tighter competitive environment between the telcos, caused by price wars, and Maxis’ more recent private placement of newly issued 300 million shares which raised about RM1.66 billion. The fund raising will be used to pare down its borrowings. This of course raised the concern of share dilution which in turn affected its share price.
  2. BjFood. Berjaya Food Bhd posted its maiden loss in its last quarterly report for the first time ever since it went public. Earnings were dragged by the closures of non-performing Kenny Rogers Roasters (“KRR“) restaurants which resulted in an impairment to its earnings. Its Starbucks business remains the only growth impetus. This can be seen from its top line growth (revenue) which grew at a stupendous rate of about 9% from FY2016 to FY2017 notwithstanding the drag from KRR. BjFood share price looks enticing @ about RM1.55 from a high of RM1.90 in May 2017. That is a 22% drop. I reckon that the company will be more profitable if it runs a pure Starbucks business. However until that day comes, expect earnings to be unexciting. Regardless of the setbacks, Vincent Tan was not perturbed from accumulating about 4.6 million shares since 29 May 2017. For more information about the company, please refer to my analysis of BjFood.
  3. Malakoff. Malakoff Corporation Bhd is like a bleeding hemorrhoid that never stops bleeding. Malakoff’s share price has decided to take a plunge to an all time low of about RM1.06. Having gathered more information about Malakoff, I do not expect its share price to rebound above its listing price of RM1.80 anytime soon due to worries of its future earnings (lower tariff on extended power purchase agreement) and the outage which plagued its newest coal-fired flagship plant,  in Tanjung Bin,  from March to May 2017. On the plus side, it paid out about 7 cents of dividend in FY2015 and FY2016. If things play out the same in the current FY2017, you can’t really complaint about a 6.6% dividend yield @ RM1.06. Keep a watchful eyes of its next quarterly report to absorb and gauge the risk associated with Malakoff’s business. For more information about the company, please refer to my analysis of Malakoff.
  4. SEM. 7-Eleven Malaysia Holdings Bhd, like its related company, BjFood, by virtue of common substantial shareholders, is also feeling the heat. Its shares has gradually been beaten down to the current RM1.40 since the start of the year. This is synonymous with a decrease in earnings caused by higher overheads namely store expansion and an increase in employees’ wages and rents. The company also blames logistical reasons for the slow sale in February and March 2017. Further, shareholders did not view the company’s proposed issuance of 616.69 million new warrants in a positive light. Because of that the said proposal was scrapped earlier this month. On the plus side, Vincent Tan has been accumulating about 24 million shares since end of April 2017.
Disclosure

I do not own shares in any of the companies listed above.

Reference:
  1. http://www.thestar.com.my/business/business-news/2017/06/19/maxis-suspended-ahead-of-corporate-news/
  2. https://www.nst.com.my/business/2017/06/250667/maxis-private-placement-shares-priced-rm552-rm166-billion-raised
  3. http://www.thesundaily.my/news/2017/06/21/maxis-shares-fall-news-private-placement-exercise
  4. http://www.theedgemarkets.com/article/maxis-raises-rm166b-oversubscribed-private-placement
  5. http://www.theborneopost.com/2017/03/18/starbucks-expansion-to-alleviate-bjfoods-cost-margin-pressure/
  6. https://cdn1.i3investor.com/my/files/dfgs88n/2017/06/14/1506076963–1498835816.pdf
  7. http://www.thestar.com.my/business/business-news/2017/06/24/challenging-times-for-malakoff/
  8. https://cdn1.i3investor.com/my/files/dfgs88n/2017/05/24/1506016511-602355912.pdf
  9. http://www.thestar.com.my/business/business-news/2017/06/01/7eleven-malaysia-scraps-rights-issue/
Thoughts

Who’s afraid of P2P financing?

Dear Readers

My last article, Who’s afraid of mutual funds?  did stir up curiosity about mutual funds and their decent yields compared to stock picking in the stock market. The apparent lack of investment knowledge, amongst Malaysians, is quite troubling especially when Malaysians are enduring higher inflation after fuel subsidies were scrapped.

Inflation is your biggest enemy. It seeks to undo all the wealth that you have accumulated. The only resolution against inflation is investing and I hope that this blog serves to disseminate investment knowledge which will be acted upon.

Today, I will be talking about P2P lending. Just so you know, this post is about my first-hand experience in P2P lending, as your worthy guinea pig.

What is P2P lending?

P2P lending or peer-to-peer lending means the coordination of a group of people (either individuals or legal entities) to pool in money (crowdfunding exercise) for the sole purpose of lending the said pooled money (or principal) to a borrower.

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Credit: Bankrate

In exchange, the borrower (usually a business seeking short-term financing) promises to repay the principal, and on top of that, the interest, over a set period of time.

Your investment return is the interest on the principal.

Most, if not all, P2P lending operators run an online platform.

Is P2P legal in Malaysia?

In case you are wondering, yes, P2P lending has been legalised in Malaysia. These P2P lending operators have been given the go-ahead, in 2016, by the Securities Commission.

What are the potential returns?

The rates are as competitive as those offered by institutional lenders on the premise that the lending is unsecured.

Unsecured lending is where a lender lends without the need for a borrower to offer a collateral as security. Because there is no collateral, the interest rate is relatively higher than the interest rate offered by lenders for secured lending. Of course, other factors are also taken into account in determining the interest rate such as:

  1. the credit worthiness of the borrower;
  2. nature of the borrower’s business (a business in a high risk industry would be offered higher interest i.e. technology industry)

From my observations, the interest rate is within the ballpark of 10-14% per annum. It is relatively higher than most conventional debt investments such as bonds, debentures and fixed deposits (but junk bonds may offer surprisingly good returns).

What are the risks?

The main and obvious risk is the risk of default by the borrower.

Other risk may include the P2P lending operator going under which may be more of an inconvenience or nuisance rather than a risk of a loss to your investment. This is because the pooled funds are segregated and held entirely by a trustee appointed by the P2P lending operator.

What does a P2P lending operator do?

The P2P lending operator establishes a platform to accommodate both, lenders and borrowers. For example, a business, in need of a lending, may approach the P2P lending operator. On the other hand, a P2P lending operator actively promotes its platform to investors so that there are sufficient  members to fund the lending.

When a potential borrower has fulfilled the credit requirements and is given the green light, the P2P lending operator will invite members, on its platform, to crowdfund the lending. Only after the crowdfunding has reached its intended target, the borrower is able to draw down on the lending.

For example, should a potential borrower requests for a lending amount of RM1 million, members would have to pool in their money to reach the said RM1 million mark. That must be done within a certain period of time which is predetermined by the operator. Only after the funding achieves the intended RM1 million mark would the fund be lent to the borrower.

If the fund fails to achieve the targeted RM1 million, within the predetermined period of time, the P2P lending operator may extend the crowdfunding time.

Investors also give an authority to the P2P lending operator to pursue debt recovery should a default arises.

What are the disclosures provided by P2P lending operator to members?

Like any regulated investment, the P2P lending operators are obliged to disclose the risk associated with the investment and also pertinent information about the borrower which includes:

  1. The terms of the lending (the amount of the lending, whether the borrower pays in monthly installments etc)
  2. The nature of the business of the borrower.
  3. The entity that owns the business (whether it is a company, partnership or sole proprietor)
  4. A background of the borrower (whether it is solvent, involved in litigation or blacklisted by any credit rating agencies)
  5. A summary of the directors of the borrower, if applicable.
  6. A past 3-year and current year financial report of the borrower (Profit and Loss and Balance Sheet).
  7. Bank account statement (monies in the bank account(s) of the borrower).

However, information which can identify the borrower’s identity remain undisclosed.

Be sure to understand the associated risks in this type of investment before pursuing any crowdfunding exercise.

Any tips to ensure maximum gain and minimum risks?

Do not put all of your eggs in one basket

There are usually a few crowdfunding exercises a month.  Say, if you have RM5,000, split your investment into 5 portions and invests them in 5 different crowdfunding exercises. That way, if one defaults, you will not lose all of your investment as illustrated below:

1 crowdfunding exercise x RM5000 x 10% per annum = RM500

5 crowdfunding exercises x (RM1000 each x 10% per annum) = RM500 (but risk of losing all of your investment is spread out)

From the illustration above, you stand to gain the same amount of return but your risk is substantially mitigated.

Be selective. It’s your money, after all

Read through the borrower’s financials, especially for the borrower’s cash flow statement and its ability to service short-term debt. It the cash flow is too constraint, move on; don’t attempt to take the plunge and hope for the best. A casino is where you should be if you want to indulge the latter.

What are the fees involved?

Generally, the P2P lending operator will get a 2% cut from your profits. Hence if the interest rate is 10%, you will effectively get an 8% return.

Any tax implications?

As much as we all hate to pay tax, unfortunately, the returns from P2P lending is taxable as it is considered by the good people of the Inland Revenue Board as interest income.

What P2P lending operator on which you are basing this article?

I am subscribed to Funding Societies Malaysia. There may be other better ones out there.

I suggest that you subscribe to more than one P2P lending operators for regular crowdfunding exercises. However, please do your research as fundraising exercise may differ from one operator to another.

My final thoughts

P2P lending is one of the most innovative ways of fundraising. It benefits individual investors, seeking good investment returns, and also borrowers, seeking for competitive borrowing interest rates.

Like all investments, there is an inherent risk of a loss. However in this case, be prepared to lose all of your investment if a borrower goes bust. On top of that, the issue of taxation may arise.

Nonetheless, with effective risk management, i.e. do not put your eggs in one basket, and research, P2P lending may be viable over the long run especially for those who can’t stomach the volatility of the stock market.

Do share this post and subscribe to learn to let your money work harder for you!

Reference

  1. http://www.thestar.com.my/business/business-news/2016/11/04/sc-issues-p2p-licences/
  2. http://www.theedgemarkets.com/article/special-report-six-p2p-lending-operators-malaysia
Thoughts

How the economy works?

Dear Readers

Everyone knows that the economy drives very facet of society; from you and me, to your average household, your employers and their clients and ultimately the government and the country.

Understanding the economy will assist you to understand the market better. I most certainly can’t explain the economy to you but Ray Dalio could in his animated video: How The Economic Machine Works.

Ray Dalio is the billionaire founder of Bridgwaters Associate, one of the world’s largest hedge funds. If the name Ray Dalio is familiar to you, you may recall that he predicted the 2008 recession in the USA.

Two things to take away from the video: debt and spending.

Enjoy!

Thoughts

Who’s afraid of mutual funds?

Dear Readers

I’m certain everyone has heard of the cliché that mutual fund is overpriced and underwhelming in terms of its returns comparably to investing directly in the stock market.

Undeniably, mutual funds are not for everyone. However, for those clueless beings who are sitting on the fence as to whether you should jump on board the mutual funds bandwagon, allow me share my thoughts about mutual funds and how they can benefit you, as they have for me.

M-2
Credit to 

What is mutual fund?

Mutual fund is a vehicle to enable an investor to pool in his/her money with other investors. The collective pool of monies are managed by a qualified fund manager; not eager college grads.

Mutual funds are highly regulated by the law and are required to provide full disclosure to potential investors in a form of a product disclosure statement (“PDS“). Think of PDS as a prospectus of sort.

A PDS sets out:

  1. the objectives of the fund;
  2. suitability of the fund with regard to an investor’s risk profile;
  3. where your money will be invested;
  4. how the fund is to be benchmarked; and
  5. the sales fees, the trustee fees and the annual management fees, among others.

Should you complete a read of the PDS, you will be fully informed as to the suitability of the fund with reference to your risk profile and investment goals.

Types of mutual fund

There are many varieties of mutual funds. The major ones are:

  1. equity (publicly traded stocks);
  2. private equity (shares of companies which are not traded on the stock exchange);
  3. bonds (debts);
  4. fixed deposit (debt); and
  5. commodities.

With such wide array of types of mutual funds, mutual funds can no longer be described as an one-size-fits-all investment as an investor could easily find a fund to match their risk profile and investment goal.

Why should you invest in mutual fund

Look, no one likes handing over 1%-2% of the total value of your investment/portfolio to fund managers in the form of management fees. That is especially true if fund managers failed to outperform a fund’s intended benchmark or when a fund barely reached your intended investment goals.

However if you have a bad experience in investing directly in the stock market, or maybe you don’t have the necessary discipline or the know-how, or just plain busy, you may find mutual funds a delight.

This is because mutual funds can be an excellent alternative to investing directly in the stock market (especially when investing in equity funds) if you do not have trust issues over the notion of parking your money under someone’s care or you are not disgusted by the idea of paying someone a “fee” for managing your portfolio.

Further, a mutual fund is usually well diversified and often containing a basket of holdings in a variety of stocks or bonds.

Can mutual funds give a satisfying result?

I can answer this with much affirmation.

I am currently investing in mutual funds apart from investing directly in the good ol’ Bursa. I choose to invest in equity funds which are investing in the overseas market.

For example, one of my funds invests in the Asia Pacific region. That region includes China, Korea, Taiwan, Singapore, Malaysia and Australia (I think). The return is decent. About 12-13 percent per annum. It’s currently at 8% only because I’ve diluted the paper profit by investing more money into the fund.

Another fund that I invest is a fund that invests in technology counters such as Apple, Samsung, Tencent, Intel, AMD and the lot. Its main playground is Nasdaq. Up by 23% from a year ago, its performance is nothing short from impressive.

Mind you, profits made from these funds have been deducted of their 1%-2% management fee. If memory serves me well, all fees associated with a particular fund is calculated and deducted daily.

The way I see it, I take advantage of the geographical access that mutual funds provide by allowing me to invest in say, Apple, without actually having to go through all the paperwork and  tax filing associated with a direct purchase of Apple stocks.

Where do I get my funds?

Sales fee associated from the purchase of a unit trust from a bank may be as high as 5%-6%. That means an investment of RM10,000.00 would incur a RM500-RM600 sales fee and you start off with an initial investment of RM9,500.00.

I tend to avoid purchasing unit trust from banks all together. Instead I recommend Fundsupermart. It is a decent online mutual fund distributor with many funds to choose from, good customer support and low sales fee (about 2%-1.75%).

However, if you have to purchase funds from the banks, ask for a discount. Because of the highly competitive nature of the mutual fund industry, some banks are able to offer a 2%-3% sales fee.

Should I be afraid of mutual funds?

You don’t have to be.

Give it a go I say. Test the waters by investing a small portion of your money in a reputable fund of your picking. You’ll never know, the results can be rather pleasant.