The House Crowd’s Frazer Fearnhead explains why he thinks the auto-invest model represents the future of peer-to-peer lending
“History has proven that only a very small percentage of stock pickers can beat FTSE tracker funds over the course of any one year,” says Frazer Fearnhead (pictured), founder and chief executive of property-backed peer-to-peer platform The House Crowd.
“I think this situation is analogous to our auto-invest product, where it makes sense for people to go into a fund that diversifies their money over a number of different loans.”
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This is the ethos at the heart of The House Crowd’s auto-invest products – to mitigate risk and diversify investor portfolios by relying on the expertise and extensive due diligence at the platform.
The House Crowd introduced its auto-invest model a few months ago, and so far the feedback has been positive, “especially from those people who had experienced some of their self-select loans going into default and had to wait longer than they anticipated for their returns to be paid,” says Fearnhead.
For the time being, The House Crowd still caters for these self-select investors. However, Fearnhead believes that auto-invest will “most likely” become the default P2P model of the future.
“It seems to be the way most platforms have gone or are going,” he says. “For most people, selecting a fund with decent diversity and better liquidity makes good practical and financial sense. “Most people aren’t experts at picking loans,” he adds.
“Our team goes through lots of due diligence and our investors can see all the information we’ve gathered. There’s not really a lot an investor can add on top of the work we’ve done other than just review our own due diligence.”
The House Crowd’s auto-invest model works by inviting investors to choose the term time of their loans and the level of security they are comfortable with.
The platform then automatically distributes each investment across all available loans that fit the criteria for that fund pot, and the investor earns target rates of up to seven per cent per year, plus occasional bonuses.
This means that if something unexpected does go wrong with an individual loan then it only represents one small part of the portfolio, thereby minimising the impact of any potential losses.
Unlike index-tracking funds, The House Crowd does not charge any fees to investors. “We make our money from charging the borrowers a fee, usually one or two per cent for making the loan,” explains Fearnhead.
“And we make a margin of approximately four per cent on top of the rate we pay investors.”
While auto-invest lending has been welcomed by the majority of The House Crowd’s investors, self-select loans are still available for experienced investors who prefer to hand-pick loans according to their own specific criteria.
“Some people want that extra level of control, which is why we will continue to offer that for those people,” says Fearnhead. “At least for the time being.
“However, if people continue to self-select high-risk loans, they may find themselves in that unfortunate position of having several loans in default. It’s not a good position for them to be in, so we are trying to guide people into auto-invest which we believe is a more sensible investment strategy.”
Like index-tracking funds, auto-invest could prove to be the key to democratising P2P lending and reducing risk in the long term.