Long-term Yields from Actively Managed Consumer Credit Assets

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Interviewed by: Zhu Jizhong* (朱紀中)
Collated by: Xu Jialun* (許家綸)

With interest rates rising across the globe, volatility has significantly intensified in the bond and stock markets. In this environment, are there any assets that sustain low volatility with an annual yield rate stabilized above 6%? “Yes, of course,” said Angie Lin, President and Co-Founder of FinEX Asia. The average yield rate of US consumer credit assets could reach above 6%, and through active management, FinEX Asia can even boost the annual yield rate to as high as 8%.

Specializing in fintech, FinEX Asia has launched the first fintech asset management platform in Asia. It is also the only asset management company (AMC) in Asia currently utilizing an AI (artificial intelligence) risk model. In June interview with Smart Magazine, Angie Lin recommended investors could include consumer credit assets in their long-term investment portfolios as interest rates rise. In this article, Angie Lin spoke with the President of Smart Magazine, Zhu Jizhong, about the long-term return rate and risk indicators for consumer credit assets. The following is the summary of their conversation. [This is the second interview in the series.]

Founded in 1998 by Shangzhou Group, Smart Magazine provides readers with professional and comprehensive investment and wealth management knowledge. From a complete and sharp point of view, the magazine introduces readers to Taiwan’s potential financial opportunities and local investment strategies while expanding readers’ investment horizons.

Stable yield, for the long-term

The President of Smart Magazine, Zhu Jizhong (Zhu): When consumer credit assets have a low volatility, would the yield also be lower than typical bonds?

President and Co-Founder of FinEX Asia, Angie Lin (Lin): The information regarding consumer credit assets is very transparent in the US market. On the online lending platforms, performance indicators for all loans are disclosed too. When Orchard, a professional lending service and research company, was established in 2011, they aggregated date from across the market to create the “Orchard US Consumer Online Lending Index” (ORCHLEND) to track the average return rate of all online marketplace consumer credit loans. This indicator shows that consumer credit assets generated an annual average net yield of around 6-7% after all costs were deducted.

For FinEX Asia’s consumer credit funds, active management through fintech raised the annual average yield to 7-8% before other costs. In certain months, the annualized rate can reach as high as 8.5-8.8%.

However, not everyone can currently invest in the FinEX Asia’s consumer credit funds. The Hong Kong Securities and Futures Commission, which licenses FinEX Asia, prefers to offer opportunities only to investors with more investment experiences and assets. Accordingly, FinEX Asia has set the required minimum investment amount to be US$100,000.

Zhu: Are consumer credit assets suitable to be the core allocations of long-term fixed income portfolios?

Lin: They are suitable, indeed. Imagine a scenario where you have planned to invest capital in an individual annual premium insurance, meaning you cannot use it within a timeframe as long as 5 to 15 years. However, you may not be content with the return provided by the insurance company. During the investment, you would also like to receive interest on a fixed-basis.

In this scenario, consumer credit assets are truly suitable for the core allocations of the long-term portfolio. But if the capital is intended for transactions, or if you want to be able to sell quickly to realize quick gains from price improvements, then this asset might not be the right one for you.

Leading indicators and liquidity risk

Zhu: Do consumer credit asset investments need to be traced? What indicators should one pay attention to?

Lin: Consumer credit assets are less correlated with typical economic indicators such as exchange rates and interest rates. The overall economy is the real influencing factor. As a result, we monitor indicators like the unemployment rate and the Consumer Confidence Index, which allow us to better understand the financial health of consumers.

Zhu: Are there also liquidity risks for credit consumer credit assets?

Lin: Any liquidity concern comes from not being able to buy or sell the products, and it would be worrying, indeed, to see many redemptions in a short period. There is no assurance that consumer credit assets would never experience this sort of scenario. Yet, a strong feature of these assets is that both the loan principal and interest are repaid at the same time. Therefore, if one experiences a significant amount of redemptions, they could defer reinvesting the repaid principal, and as a result, improve the fundamental cash flow.

In fact, the most worrying liquidity risk is the inadequacy of the cash flow. FinEX Asia’s systematic management identifies periods where cash is at a relatively lower level and allocates a portion of the consumer credit assets held on the accounts back on the online lending platforms to let other individuals or institutions purchase them.

What’s more, this type of consumer credit asset could also be deemed as a guarantee of the loan. Cash could be obtained from the bank, however, this approach would generally not be used. In fact, it is rare to come across a large number of redemptions, since every month clients receive dividends with low price volatility. This makes it unlikely to create liquidity risks, due to the low level of fear.

Zhu: Credit information for almost all borrowers is available on the US online lending platforms. What else does FinEX Asia provide?

Lin: In the US, almost every bank utilizes the information related to the FICO score. FICO scores are used by nearly 90% of the large US financial institutions to assess the risk of individual borrowers and make decisions regarding credit card and loan issuance. However, consumer credit revenue still varies across these same banks, which suggests the highlight is not the information itself, but whether the risk models accurately use the data to reveal the hidden risks. FinEX Asia as integrated this kind of risk control and management model into our asset management process.

For instance, when a person moves three times a year, in a region where people only move once every three years on average, with no other reasonable grounds available, we may predict that the changes are caused by instability at work. Compared with the others who have a stable job, the default risk of loaning to this person would, therefore, be higher. In FinEX Asia’s pricing models, this person would be categorized as a target in need of a higher loan interest rate or be refused in their loan application, thereby diminishing risk in the portfolio and raising the effective yield.

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