Lending Club Blog

Google This: “Searching for Better Yields”

Individual investors aren’t the only ones thirsting for stronger yields on their cash these days.

Large investors—including some of the world’s largest corporations—are also looking under every yield rock and stone for better ways to generate respectable returns on their cash.

With interest rates hovering at historic lows and a stock market that many investors find hard to trust, you don’t have to be Warren Buffett to see that lower-risk investments like cash deposits and bonds may not get you to the promised land of desired portfolio returns.

Necessity being the mother of invention, the drive for higher returns has pushed people—and institutions—to search for better returns elsewhere.

 

Even Google Is Looking For Options

Which brings us to the story of Google (who you probably know as the biggest search engine on the planet).

Google has about 43 billion dollars’ worth of cash, according to its Q2 2012 earnings report (the fourth highest total among the S&P 100). Like every serious investor, Google takes managing its cash seriously, even creating an entire trading floor to oversee its own investing.

Like everyone else, Google is looking for better ways to invest its cash. And, being the innovative firm that it is, it found something much more creative (and lucrative) than simply stashing its cash in the bank in CDs, Treasury bonds, or even highly rated corporate bonds.

 

Google’s Solution: Fixed Income Investing

Word got out a couple of weeks ago that the technology leader had plowed hundreds of millions of dollars into investments tied to consumer car loans and consumer credit card payments. These investments are what are known as “asset-backed securities” (ABS).

When consumers take out loans to purchase a car, they often use that car as collateral, and the bank takes a security interest in the car. The bank then pools these loans to back securities sold to large investors—like Google.

Google, searching for better yields, decided to sink a significant chunk of its cash into these types of investments.

Auto ABS have been some of the more resilient investments during this current economic cycle. According to the Wall Street Journal, the auto portion of an ABS index compiled by Barclays showed returns of 2.34% this year, with an average maturity of just over two years. Compare that to 0.30% for comparable Treasury bonds this year.

Google those returns, and the result could be hundreds of millions of dollars.

 

Like Google, Investors Must Search More Broadly

So, what’s an individual investor dissatisfied with his or her current portfolio income to do?

Unfortunately, there isn’t an easy way for individual investors to invest in ABS (though there are Exchange Traded Funds – ETFs – backed by mortgages). In addition, some recent ABS have been priced to yield as little as 0.5%.

One thing individual investors can do, however, is consider investing in Lending Club Notes.

These are essentially investments in loans made to credit-worthy individuals, many of whom are interested in consolidating their debt. By bypassing traditional banking channels and the inefficiencies of the personal credit market, these individuals can generally borrow money at rates more favorable than they would get through other channels (like credit cards). Although these loans are unsecured—unlike the underlying loans in auto ABS (which are typically secured by the cars)—investors in loans originated through Lending Club may be able to experience potentially more robust returns.

Lending Club Notes offer investors the potential for:

  • Solid returns: 93% percent of Lending Club investors with 800+ Notes earn returns between 6% and 18%.[1]
  • Backed by good credit: As of August 14, 2012, individuals borrowing through Lending Club averaged a FICO score of around 700.
  • Strong historical returns: Lending Club Notes have provided a Net Annualized Return by grade between 5.80% for A-Grade Notes and 11.51% for G-Grade Notes.[2]
  • Lower volatility: Lending Club notes have provided 20 consecutive quarters of positive, steady returns.[3]

Investors are hurting. Many are tired of the stock market’s volatility yet still desperately seeking income. Google’s recent foray into auto loan ABS underscores how creative investors must become in this market to achieve their desired gains. Lending Club can be a key tool in helping investors achieve the investment income they desire—and deserve.

 

 


[1] Return calculations based on accounts that have invested in 800 or more unique borrowers directly via the Lending Club platform. Eight hundred Notes can be purchased with $20,000. All data as of August 14, 2012. The availability of Notes/unique borrowers is dependent on your investment criteria. There is no guarantee that you will be able to invest in 800 or more Notes/unique borrowers promptly, if at all.

[2] Net Annualized Return of individual grades as of August 14, 2012. To be included in the Net Annualized Returns calculation, a Note must have been originated at least 3 months prior to the calculation date.

[3] Based on platform performance as of August 14, 2012.

The foregoing is not directed to the specific investment objectives, financial situation, or investment needs of any particular person and should not be considered investment advice. Nothing herein constitutes an offer, or solicitation of an offer, to buy or sell securities either generally or in any state or other jurisdiction where the offer or sale is not permitted. The information contained herein is generally believed to be reliable, but no representation or warranty is given with respect to its accuracy or completeness. Past performance results have inherent limitations as to their relevance and use as they ignore certain factors such as timing, liquidity, and the fact that economic and market conditions in the future may differ significantly from those of the past. Past performance is no guarantee of future results.

Notes offered by prospectus filed with the SEC. You should consider reviewing the prospectus with a financial advisor prior to investing.

 

 

Friday, September 14th, 2012 at 3:25 pm

Comments (2)

  1. Plasticman:

    As long as a lender member’s N.A.R. (Net Annualized Return) is just
    1 penny or more – a lender member has not lost any Principal!! All
    No Payers and Slow Payers non payments are deducted from that
    N.A.R. So lender members like myself making $25 investments on each
    loan don’t need to have collateral such as an old pair of SHOES or
    SOME ITEM that didn’t Sell at the Borrower’s Garage Sale! And don’t
    have to pay a Lawyer to collect!! Lending Club is also paying 260
    days a year. Mon,Tues,Wed,Thurs,Fri. ! Q.E.D. Plasticman

    September 18th, 2012 at 10:25 am

  2. TonyTouch:

    Interesting that there is no mention of the global financial
    trouble that Mortgage Backed Securities caused. Are packaged ABS
    really so different? Could you explain? They are different in some
    ways (a car buying boom & bubble seems unlikely), others not so
    much (good luck getting that defaulted collateral from your
    packaged security). I find the subtle undertone that “if Google
    does it, so should you” a bit disingenuous. Google can make their
    own markets at that financial size and are investing in a different
    class of security (ABS) than Lending Club loans. The average
    Lending Club lender is not in that league. Google’s foray, as you
    call it, is simply diversified investing at an enormous
    institutional level. They are just as likely to be in other new
    products which are available to Billion Dollar Cash holders. I’ll
    bet they are buying junk bonds, too. Is that a sign I should invest
    in Lending Club loans? They are both debt repayments. I love
    Lending Club, but what Google does with its Billions isn’t relevant
    to me as a small time investor.

    September 20th, 2012 at 12:46 am

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