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Core and Plus: how’s it going?

We launched Zopa Plus in March 2016 and it’s been our most popular product for new money ever since. In June 2017 we launched Zopa Core and retired our Safeguard products in December of the same year. So now we’re all-in on Core and Plus.

It’s great news then, that our stats show Core and Plus are on track. With over two years of data on Plus, we can share some powerful insights.

So let’s dig into this in a bit more detail.

For starters, we’ve looked at how much investors have earned (after defaults) and compared that with the different target rates we’ve been advertising since launch. The data shows that most investors are earning returns at or above their target rate.

Getting personal – what this means for your investment

With Core and Plus, your money is invested in a basket of different loans. This means your portfolio of borrowers is unique to you, so your loan book will be a little different to your friend’s or any other customer’s. Therefore, you might end up earning more or less than the target Core or Plus return.

Seen as a visual, this looks like a bell curve. Financial graphs can be a bit confusing at the best of times, but this one’s really all about people. Most people are very close to the target return, with some above and some below.

But the laws of probability also say that a few people will see returns a bit further above or below the target return. This happens when the number of defaults in an investor’s portfolio is much higher or much lower than average – at least in the short term.

It’s important to remember that, over time, most investors will trend towards the target return. So, if you’re overperforming or slightly underperforming at the moment, it doesn’t mean you always will be. We’ll get into this more in the next segment.

With peer-to-peer investments, your capital is at risk. And it’s possible that statistics in this post could get worse if economic conditions deteriorated. But most Zopa investors are seeing, and will see, competitive returns on their investments, at a lower risk than stocks & shares. Currently cash isn’t much of an option – even the best-paying savings accounts right now don’t beat inflation (unless you can lock away your cash for at least three years).1

A matter of numbers and time

Given that most investors are earning returns with Zopa peer-to-peer options, what can you do to give yourself the best chance of a great experience?

Diversification is the word we use for spreading your investment across lots of loans, and it’s key to maximizing your likelihood of earning the target returns. There’s two ways to think about diversification: the number of loan chunks your money is initially spread over, and the length of time you invest.

Loan chunks

When you first invest, we divide your money over at least 100 different loans.  Any fewer than that and we’re not comfortable. But the more loan chunks you have, the more likely you are to earn close to the target rate – that’s just how the laws of statistics at work.

Here’s what that looks like in practice. On average, 90% of customers with less than 200 loans in Plus have earned a return within 2.5% of the average return, while 90% of those with more than 1,000 loans achieved within 1.2% of average.

Time

Over time if you reinvest your loan repayments, and maybe add more funds, your money will get spread across even more loan chunks – essentially repeating the point above.

The other thing about time is that it averages out when defaults occur. In the early days of your investment, it might seem like you’re earning a return well above target – this could just mean that your expected defaults haven’t happened yet. Or perhaps it seems like you’re underachieving – which could just mean that you’ve had more of your expected defaults early, and can look forward to a stable period with fewer defaults.

The stats bear this out. 90% of customers who’ve invested in Plus for between a year and 18 months have seen returns so far within 1.6% of average; on the other hand, for our oldest cohort of Plus investors (investing for 2.5 years), 90% are within 1.1% of average.

We’ve sketched an example of this in the picture below.

Kirsty has a few defaults early in her investment. When she compares her investment to Phil after a year, it looks like Phil is doing much better – and another couple of months later, it seems to be going from bad to worse.

But over the course of the second year, things start to even out. A few of Phil’s loans go into default, while one of Kirsty’s loans gets recovered. After two years, their investments are in a pretty similar position overall.

The bottom line is: our data shows that investors who invest and take a long-term view are most likely to enjoy a consistent, attractive return with Zopa. It can be exciting to regularly check in on your Zopa investment, and we’re working behind the scenes on improved tools to help you track this. But remember that Zopa loans can be up to five years in duration, meaning there’s a lot of interest repayments to look forward to.

What we’re working on

As a Zopa investor, your loan book is unique to you, and we want to make our data more accessible and insightful for you. Therefore, we’ll soon be rolling out a new dashboard on investment performance to Core and Plus investors who’ve been investing for at least a year.

Spreading your money across at least 100 borrowers means that most investors earn great returns, but we want to reduce variability even further. Over the coming months, we’re working on revamping our tech to allow smaller loan chunks and greater diversification.

Note: all statistics refer to Plus investors who’ve been invested for at least 1 year at our recommended minimum diversification level of 100 microloans. We mainly shared examples for Plus, because it’s been around a bit longer – but it’s a similar story for Core.

 1) Based on consumer price inflation (CPI) rate of 2.4% reported for September 2018 by the Office for National Statistics. As of 9th November 2018, the top paying three-year fixed rate savings account, according to Money Saving Expert, offered a rate of 2.41%.

Natasha Wear is Head of Investor Products here at Zopa

Remember, with peer-to-peer investing your capital is at risk, and your actual return may be higher or lower than the advertised projected target return. Unlike a savings account from a bank, you’re not protected by the Financial Services Compensation Scheme (FSCS).