Last week we released our new Portfolio Manager and dashboard for retail investors. The logic behind the simplicity is to provide passive investors with a fully automated investment tool and a single control center for tracking and adjusting their portfolio. Together with our support team we´ve summed up top questions that we received from you via e-mail and blog and grouped them in two sections.
New dashboard and calculation logic
How is Net Return calculated and why does it change on a weekly basis?
Net Return is calculated daily and we use a methodology called XIRR (Extended Internal Rate of Return) using the loan issued date and amount, loan repayment dates and amounts and the principal balance according to the loan schedule. We write off all overdue principal (as shown on the new dashboard) payments immediately and don´t make provisions for future losses (we don´t write off a proportion of the outstanding principal that is scheduled to be paid back in the future) as we only take into account received (not accrued or scheduled) interest payments. A more detailed explanation about the net return calculation is available in our investment guide.
What is Overdue Principal and how is it calculated?
It is the total amount of principal that is overdue according to the repayment schedules. The same logic is used for calculating Overdue Principal as the write-off for the Net Return calculation. E.g. you have an investment of 100 euro that was supposed to pay 5 euro a month in principal. The loan is overdue by six payments. Overdue principal in this example would be 30 euro that was supposed to be paid with these six payments.
Why is Account Value only accounting for Overdue Principal?
All loans are priced on the assumption that a certain proportion of loans are not repaid. The default and corresponding recovery is factored into the interest rate so that interest payments on performing loans are high enough so the total portfolio delivers the expected return. As interest and reinvestments of repaid principal are made monthly then all provisions are matched to the same period. Otherwise we would compare lifetime losses of a portfolio with the interest income of a couple of months. This logic would potentially work only with a very short investment focus but as investing on Bondora is a long-term investment then it does not make sense.
There are two financially sound alternative views to calculating the portfolio value the way we do in the new dashboard. First is based on IFRS rules for banks and the second based on repricing of all loans in the portfolio according to a similar logic we use for pricing new loans. We plan to roll out both methodologies by the end of the year so that in the future investors can choose which context fits their requirements. Discounting the balance of overdue loans and matching this number with income makes sense for mortgage and super-prime loans (e.g. our competitors ZOPA) where the income of the performing portfolio is negligible (a couple of percentages) so a loss can effectively never be properly repaid by income on the portfolio.
What is Outstanding Principal and how is it calculated?
It is the total outstanding principal amount of your outstanding investments. In short, it´s all of your investments minus principal repayments.
New Portfolio Manager
What´s the difference between conservative, balanced and progressive options if the expected return pretty much looks the same?
The different Portfolio Manager options are targeting somewhat different risk-return level loans based on our historical loan supply. The three risk-return options allow you to decide if you want to build a portfolio that is on average less profitable (and risky), more profitable or at average profitability.
What does Expected Return show?
It shows an estimated return for investments at selected risk level with diversification of at least 200 loans. The estimated results are based on Monte Carlo simulations run on historical data.
In case you are still using our old Portfolio Manager then there are three good reasons why you should consider upgrading. The new Portfolio Manager:
- has priority access to new loans
- delivers risk control for your entire portfolio
- does not need changing every time you make a new deposit
Kristi Saare from her blog Money Is Your Friend did an interview with our CEO Pärtel Tomberg about the new investor product – you can read about it here.