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LendingClub Portfolio Composition

LendingClub Portfolio Composition

Screenshot from lendingclub.com

I had spoken about risk mitigation in my introductory post about LendingClub and I want to expand on that topic here. My research revealed to me that LendingClub screens their applicants fairly well and only a small percentage actually are approved to borrow on the site. Most of my research has been studying their SEC 10-K and 10-Q filings. Most people don’t know about these reports, but they contain important financial information and insight on how the company operates. Since I am an experienced stock market investor, I comb through SEC filings regularly as one of my research tools.

Mix Up the Risk

Another article about diversity. Oh boy, when will people stop talking about this subject! Never. Some believe diversity is the “only free lunch.” I know diversity is an important tool in risk mitigation. I have included my current composition chart on LendingClub by Grade. As you can see, I have invested in as many Grade A notes as I have in Grade D loans. I wanted to strike a balance of higher returns and lower default rates so I decided to go with a dumbbell type composition. Actually, I take that back. The truth is I messed up at the beginning and didn’t quite do enough research so I ended up investing in a lot of lower grade notes that resulted in a huge hit to my principal.

I’m trying hard to bulk up my portfolio with more A Grade notes bought at par. I can’t seem to find any good ones selling below par, which is to be expected. I can only assume that the people who sell high grade notes at par need the cash in the near future or believe their note is riskier than its original grade. You have to be careful and review these carefully!

A balanced portfolio consists of all types of notes. You can easily make modifications by investing heavier on A Grade if you want to be more risk adverse. The opposite is true if you want to take on more risk. There is no magic formula. It all depends on how much risk you want to take on, which really depends on how much risk you can afford to take on. Let me remind you. Only invest money at LendingClub that you can afford to lose, similar to investing in the stock market.

Interesting Information

A scan of the latest 10-Q filing revealed that the current default percentage of A2 through A4 notes are actually lower than A1 loans. The actual numbers are below.

  • A1 – 0.83%
  • A2 – 0.52%
  • A3 – 0.68%
  • A4 – 0.53%
  • A5 – 1.08%

There was also an interesting correlation with the percentage of notes 30+ days late. The actual numbers are below.

  • A1 – 4.00%
  • A2 – 0.00%
  • A3 – 0.76%
  • A4 – 0.33%
  • A5 – 0.68%

My theory behind this is that many A1 Grade borrowers are new to borrowing and end up defaulting because they miscalculate how much they can safely borrow. A high credit score can mean very little borrowing has occurred in the person’s lifetime. A lot goes into calculating how much a person is able to borrow and people who have not borrowed before miss many of the factors.

I find it interesting that the A1 Grade notes are actually the second riskiest A Grade notes, behind A5 Grade notes, according to the most recent “default” percentages that the 10-Q shows. The A1 Grade notes actually have the worst “30+ days late” percentage of all the A Grade notes!

Are you scratching your head? I am!

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Categories: Investing, LendingClub
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