Author Topic: LC ANAR is nonsense, how should I value my portfolio  (Read 15901 times)

Fudgenut

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #15 on: February 25, 2016, 03:17:16 PM »
Actually, we at PeerCube for our Pro Plan subscribers, do the bolded item below that you are asking for.

That is nice, well done!  I am guessing it is not possible to capture the actual sale price?  I suppose if it disappears since your last query (and it did not expire), you would know it either sold or was taken down.  That is probably not good enough to be helpful, though.

AnilG

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #16 on: February 25, 2016, 03:34:06 PM »
It is not easily possible (on the fly) to determine whether a listing expired, repriced by seller, or cancelled due to payment processing state. Only thing we know that listing is no longer listed on platform.

Below is a screen capture of what we show when someone want to sell a note on secondary market. The suggested selling price is all over the place due to inefficient market and lot of spurious listings where selling price makes no sense (most probably listed by sellers expecting to find sucker buyers).

Actually, we at PeerCube for our Pro Plan subscribers, do the bolded item below that you are asking for.

That is nice, well done!  I am guessing it is not possible to capture the actual sale price?  I suppose if it disappears since your last query (and it did not expire), you would know it either sold or was taken down.  That is probably not good enough to be helpful, though.
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rj2

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #17 on: February 25, 2016, 04:23:41 PM »
Return is past performance of the portfolio. It has nothing to do with what may happen to the portfolio today or in the future.

I would challenge that. If you hold a single note that started as "A" grade and is now "F" due to deteriorating credit score and a history of missed payments, you are wrong to value it at its principal even if it is current now. You need to discount it, just like you discount notes that are late but under 30 days.

If you are going to argue that you can include 10% of the value of a note in default it is logically inconsistent to value a current note at 100%. You are valuing based on the future likely payments. This means the ANAR provided by LC cannot be used to calculate return as it grossly overstates the value of your account.
« Last Edit: February 25, 2016, 04:37:23 PM by rj2 »

lascott

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #18 on: February 26, 2016, 10:15:00 AM »
Lot of gold and insights in this thread (by others not me). OP seems to want to ignore them all.  Insightful comments on what the end goal is and the angle you are looking at.

Reminded me a few sayings which lead me to the below point on gold flakes... (ok, aside from the obvious that you can catch more flies with honey than with vinegar ... now and in the future <grin>)

http://www.luckypanner.com/3-of-the-biggest-mistakes-made-when-panning-for-gold/
Quote
Mistake #3 - Sifting Away Gold Flakes
A third mistake made when panning for gold is being too rough with your pan, which causes small flakes of gold to wash away in the water. <snip>

If the major concern is "current" notes not being accounted for why not use Fred's straightforward method of looking at LC download data to determine what YOUR "current" projected write off % is and just use LCs forumula?  To me if they stop paying then they will move to grace, late X days, and will be accounted for. Apparently that's LC angle too.

You can, if you use the formula rather than the tool:

« Last Edit: February 26, 2016, 10:43:33 AM by lascott »
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Rob L

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #19 on: February 26, 2016, 11:21:17 AM »
The suggested selling price is all over the place due to inefficient market and lot of spurious listings where selling price makes no sense (most probably listed by sellers expecting to find sucker buyers).

Does that mean the idea mentioned earlier of using the secondary market to provide price discovery for the present value of loans is premature?

rj2

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #20 on: February 26, 2016, 11:24:09 AM »
"To me if they stop paying then they will move to grace, late X days, and will be accounted for. Apparently that's LC angle too."

Think through this. Why does the LC calculation value a note in grace period at more than $0 but less than principal? The answer is that their ANAR calculation is using the likelihood that the note will be charged off in 9 months.

Fine.

But why isn't that same approach used for current notes? There is a likelihood some of those will be charged off too, and trust likelihood will depend on the grade of those notes.

By NOT using the likelihood a note will be charged off for current notes LC is grossly overstating the value of your portfolio, and any rate of return you calculate using their data is an artificially inflated return.

Fred's method is the best you can do without a ton of work but it still isn't really accurate as it doesn't take into account the average age of notes in the portfolio, nor is anywhere provided the current grade of the notes as opposed to the starting grades (IE, regrading based on changes in credit score and payment history). Grade isn't being used in LC's ANAR either so far as I can tell, not even starting grade.

A commercial lender would factor all that in when valuing their loan book. What LC is providing us as a statement of our return is an inflated fiction.
« Last Edit: February 26, 2016, 11:27:07 AM by rj2 »

lascott

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #21 on: February 26, 2016, 12:21:23 PM »
What LC is providing us as a statement of our return is an inflated fiction.
You may like some of the history of ANAR. It is fairly young at just over 2 yrs old.

Title: When did Lending Club add Adjusted Net Annualized Return (ANAR) - Nov 2013
http://www.lendacademy.com/forum/index.php?topic=3632.0
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Rob L

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #22 on: February 26, 2016, 12:30:20 PM »
As mentioned above, this topic has been widely discussed in the past.
For example: http://www.lendacademy.com/forum/index.php?topic=3365.120
You will see mention of the "problem" with current notes being fully valued by ANAR.

nonattender

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #23 on: February 26, 2016, 01:37:30 PM »
"To me if they stop paying then they will move to grace, late X days, and will be accounted for. Apparently that's LC angle too."

Think through this. Why does the LC calculation value a note in grace period at more than $0 but less than principal? The answer is that their ANAR calculation is using the likelihood that the note will be charged off in 9 months.

Yes, think this through:  In striking a balance between "valuation" (position) and "probability of future state" (momentum), they've set
the left side of the equation to par ("present value") and have pushed all of the probabilistic assumptions, about future, to right side...

This strikes me as an inherently reasonable and balanced thing to do, for a variety of reasons which apparently elude you, though you
remain free to do whatever calculations you'd like, using whatever assumptions you'd like - though I think you need a savings account.

You'd probably sleep better at night...
A little nonsense now and then is relished by the wisest men.

AnilG

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #24 on: February 26, 2016, 02:31:07 PM »
The screen capture that I posted about FOLIOfn sell order and suggested prices shows the issues with using FOLIOfn listing prices for valuation. There is just too much variation in listed prices to be able to use mark to market method. Also, we don't have last settlement price so we are just guessing that the last settlement price most likely is lower than the lowest listed price, but how low we don't know.

In my experience most times on institutional side, using the 9-month loss estimates published by Lending Club to come up with present 'intrinsic' ('fair market') value is sufficient during estimation of loan loss reserves. We could go deeper and come up with 9-month loss estimates based on portfolio grade distribution, but the return on effort is not sufficient and auditors are not fond of home-grown estimates.

The suggested selling price is all over the place due to inefficient market and lot of spurious listings where selling price makes no sense (most probably listed by sellers expecting to find sucker buyers).

Does that mean the idea mentioned earlier of using the secondary market to provide price discovery for the present value of loans is premature?
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Fudgenut

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #25 on: February 26, 2016, 03:15:32 PM »
I thought of this situation in a different way.

A present value calculation takes a series of payments at different times and makes calculations on each payment to bring the time period of each payment all to the same day (the present).

The ANAR calculation does a similar thing, but discounts notes to bring the status of all the notes to the same status (Current).

Applying some sort of discount just to the notes in the current status would not really accomplish much.  If you are trying to account for current notes defaulting, you should in fact apply a discount to the end result of the entire ANAR calculation.   This would then take into account the chance of a note that is currently late becoming current, but then defaulting again later.

So, my point is, the ANAR calculation and accounting for current notes defaulting are not the same thing.

Fudgenut

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #26 on: February 26, 2016, 03:29:00 PM »
Also, it is entirely possible that the present value of your portfolio of all current notes (after being appropriately discounted) is actually MORE than the total value owed.  This situation can occur if the notes were purchased at a favorable rate, and it all depends on what rate you use as the opportunity cost rate.

Fred

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #27 on: February 26, 2016, 11:24:04 PM »
The second questionable thing here is "9 months". Loans are either 36 or 60 months, not 9 months, and what you care about is the final disposition of the loan, not where it will be part-way through.

This is actually not too questionable.

Using Payment history data, the average life of 36-mo loans is 17.8 months, while the 60-mo loans is ~14 months.

"life" = from origination until paid off or charged off.


rj2

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #28 on: March 01, 2016, 11:42:20 AM »
The overstatement of ANAR is the reason why it declines over time. A properly discounted return shouldn't decline over time. Not sure why anyone defends it.

What you really want to know is whether your charge offs are trending above or below expectation. Discounting current notes for expectation is one way to accomplish that. Change in return should indicate variance from initial expectation.
« Last Edit: March 02, 2016, 03:22:15 AM by rj2 »

dompazz

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Re: LC ANAR is nonsense, how should I value my portfolio
« Reply #29 on: March 04, 2016, 03:47:09 PM »
The overstatement of ANAR ...
I don't fully agree with that.  Assume you had 1 note and it issued this morning.  What should your value be?  It better as hell be the principal of the note or greater, why else would you buy it?

I do agree that ANAR is not accounting for shifts in borrower quality and interest rates.  LC's discounting of value based on status, while flawed, tries to get to the first part.  In the example above, if LC raises rates by 0.25% across the board 15 minutes after my note is issued, value is definitely lower and not accounted for in ANAR.

But Anil is right, without a functioning secondary market with true price discovery, you won't ever have enough information to properly value your notes.  12 months in, you've got an updated FICO and a brief history of payments to update your default model.  MAYBE you can get a decent picture of default probabilities from that.  But good luck figuring out the proper discount rate for a 24 month, seasoned, amortizing loan!

Is ANAR perfect, definitely not.  Is it better than just taking principal remaining, definitely.  Use it as part of a mosaic of other imperfect information for understanding your portfolio.  Unless you are managing a hedge fund for outside investors.  Then hire a monkey, make a run at a model, and mark to it.