European lender Mintos has posted its monthly publication that offers an overview of what’s been happening on the platform, “including recent investor activity, educational topics, and more.”
Here are the main takeaways:
- Investors are now “able to donate to help the people in Ukraine and refugees through Mintos”
- The largest part of Mintos’ portfolio “is not affected by the war in Ukraine”
- In terms of activity, investors on Mintos “earned over €2.9 million in interest at an average rate of 9.49% in February”
- The average net return for last month “was 1.22%, and the average portfolio value was around €2 700”
Comment on the war in Ukraine:
On 24 February, our world was “turned upside down when Russia invaded Ukraine.” As the country is ravaged by war, many of you have “been vocal about wanting to donate through Mintos to help the people in Ukraine and refugees.” Mintos confirmed that they have heard you, and they’ve “launched functionality that will allow you to do this.”
The update confirmed that Mintos is “a regulated entity with a contingency plan and sizable cash reserves which allow [them] to plan and adjust our business according to the development of any situation.” Their exposure to Ukraine “is less than 0.5% of the total outstanding portfolio, and loans from Russia represent less than 15%.”
The largest part of the outstanding portfolio on Mintos (85%) “is performing without any problems.” They will continue “to monitor new developments and will inform you on our blog about any direct impacts on investors and Mintos.”
Lowering risk via asset class diversification
Mintos also shared:
“Whether it’s pandemics, political instability, or the changing dynamics of local markets – movements in the investment market can be unpredictable at times. And it’s often investors with highly diversified portfolios that ride out these ups and downs better than the rest.”
For those new to the concept, diversification is “an investment strategy where you have a portfolio of assets with different characteristics – such as asset class type, country of origin, currency, or maturity.”
By including assets with different characteristics, “it’s less likely that one change in the market will affect your entire portfolio in the same way.” So essentially, this strategy “aims to reduce risk. However, as there’s no one-size-fits-all approach to implementing this strategy, it can be tricky to know where to start.”
So this month, Mintos looked at one method in particular: “diversification across asset classes.”
Correlation is key
As noted in the update:
“When diversifying across multiple asset classes, investors often look at something called correlation – which is the measure of how much (or how little) two asset classes follow each other in the same market conditions. If there’s a strong positive correlation (expressed as +1) between two asset classes, macroeconomic changes (such as interest rates) will affect both asset classes in the same way.”
However, if there’s a low or negative correlation (expressed “as -1) between asset classes – they will react differently to a market change, so one asset may go up, while the other goes down.”
The update also mentioned:
“When a portfolio includes non-correlating assets, it’s less likely that one market change will affect the whole portfolio. And as a result, the overall volatility of the portfolio is ideally ‘smoothed out’ – which is the aim of diversification.”
Alternatives challenging traditions
As early as the 1950s, Modern Portfolio Theory “suggested that the optimal portfolio mix consisted of stocks and bonds (as they are non-correlating assets).” However, as other non-correlating asset classes, such as real estate and commodities, gained popularity among investors, “so did the options to reduce portfolio volatility.”
As noted in the report:
“Now, more alternative asset classes are proving to be valuable additions to diversified portfolios. The loans asset class, for example, has low (or even negative) correlations with traditional investments like stocks and bonds, meaning loans can be valuable in minimizing overall portfolio risk3. Plus, they are generally non-correlated with other modern investments such as stock ETFs.”
As stated in the update:
“Diversifying across asset classes may help in avoiding the big highs and lows that one asset class may experience, and potentially lead to more stable returns over time. But at the end of the day, it’s important to keep in mind which asset classes align with your investment goals, time horizons, and risk appetite. For more on diversification across asset classes, see our Investor Academy article on strategic asset allocation.”
Mintos Activity: February 2022
In February, more than 550 000 loans “were funded equivalent to €103.7 million, and investors on Mintos earned over €2.9 million in interest at an average rate of 9.49%.” The “top 3 markets for investments in loans were: Spain, The Russian Federation, and Kazakhstan.”
As noted in the report:
“[There were] healthy levels of investment continued on Mintos in February, and the average interest rate for loans in the EUR denomination on the Primary Market increased by 0.6 percentage points, to 9.4%.”