We've all looked at the deterioration in LC loan performance over 2015 & 2016 in a variety of ways. We've charted delinquencies, chargeoffs, by time, by vintage, used different return measures, etc. Here's something really simple.
I used numbers from LC's chart with all those dots,
https://www.lendingclub.com/info/statistics-performance.actionThis chart shows the performance of INVESTORS rather than performance of loans, so is therefore close to investor's hearts. One downside is that this chart uses ANAR to measure investor performance. I won't detail all the characteristics of ANAR here, but one is important enough that I have to say it. ANAR measures your performance since you opened your account. Those of us who have been investing with LC for a long time, have higher ANARs, just because ANAR averages over all the time our accounts have been open, and returns were higher in past years than they are now. My account is 9 years old, so this is painfully clear to me. I suspect that many accounts have been open just a few years, so perhaps this effect isn't so bad on the average. Just be aware. If Joe's ANAR is 7%, he may be earning only 4% now, for example.
This chart has been changing vs time. Lets look at what this chart NOW says.
I made the following selections...
Adjustment for past-due notes: ON
Min number of notes per account: 500 (Lets look at well diversified accounts, so we know the numbers are not noise)
Max note size less than 0.5% (Same thing, ie well diversified accounts)
Now, there's one more selection, the weighted-average-interest-rate WAIR. This, like credit grade, is just a measure of the riskiness of the loan, as LC sees it.
In the middle of the graph, LC highlights accounts with average age of loans in the portfolio of 12 to 18 months. This is a reasonable definition of a steady-state account, so lets use that selection. LC displays 10th percentile, median, and 90th percentile ANAR for accounts in this range.
Finally, here's how the median ANAR varies with WAIR.
WAIR 10% Median 90%
0- 9% 4.8% 5.3% 6.0%
9-12% 4.2% 5.2% 6.4%
12-15% 3.4% 4.7% 6.3%
15-18% 2.2% 3.6% 6.5%
18+% 0.5% 3.6% 6.5%
ALL 2.7% 4.8% 6.3%A lot of numbers. Just look at the Median column. This shows ANAR for the median account in the selected group. As you can see,
as WAIR goes up, ANAR goes down. Its monotonic! The best performing accounts TODAY are those who invested over the past few years in the low interest rate (ie safest) loans. The worst performing accounts are those who invested in the riskiest loans.
Among today's accounts, you can see that investing in higher risk loans did not give most investors any advantage. This is true for the median account, and also true (within one tenth of a percent) at the 10 percentile and 90 percentile account!
The median LC investor today holds an account with an ANAR of 4.8% . My account's ANAR is much higher, and yours probably is too, but I opened that account about 10 years ago, so my ANAR averages over times when returns were considerably higher. Doesn't mean I'm doing better than average lately. In fact, I have very little idea how I'm doing relative to other LC investors lately.
Meanwhile, the facts for today are that accounts TODAY have a median ANAR of 4.8%, and accounts TODAY show higher ANAR if they have portfolios of lower interest rate loans. (Those accounts picked those loans over the last few years, so this result tells us about the performance of those vintages. Unfortunately doesn't tell us what loans picked today will do.)
This is consistent with facts we know about loan performance degradation during the past two years. Performance and returns on the higher risk grades have gone to crap.
Historically, we have a name to categorize times when loans perform this way (ie when investing in the safest loans was the best strategy, and investing in the risky loans was the worst strategy). We call those times recessions, or credit crises, or some such name. We haven't been in either a recession or a credit crisis during 2015/2016, so the explanation is elsewhere.
I blame LC. I believe they made considerable changes to their loan underwriting in 2015 to accept more loans, in order to drive volume. Also possible of course that they just screwed up. Although they have (multiple times) given lip service to improving loan quality, I see no evidence of same. I will continue to look.
Among other things, these changes have invalidated all the wonderful historical data. A lot of back-testing is now simply misleading. This is quite a loss. We now have nothing to guide us. Most of us still use filters we derived from back-testing. I do. However, over the past year I've changed how I think about back-testing quite a lot. I'm suspect this change in attitude is widespread. In past years, careful attention to historical data gave me an edge of several percent. Now it looks like that edge is gone. That's just the way it is.
