Lending Club FOLIOfn Returns and Penny Note Strategy Update

In mid September, Lending Club added a returns section titled ‘Traded Notes’ for investors.  This feature gave all but the most serious traders an accurate number of what their returns are with FOLIOfn (Returns aren’t calculated over 100%).   This is a welcome change as up until this point, you were on your own calculating returns - which is no small task.  Since both traded notes and notes bought at issue are combined in your account value, tracking every note was necessary to calculate returns. Back in June, I featured a guest post from New Jersey Guy and his Penny Note Strategy. (You can see all of the content he has contributed to PSL here)  I have purchased over 200 notes using this strategy and although all notes aren’t completed, I have a more accurate idea of my returns and whether I should continue buying notes using this strategy.

Below is a summary of my traded account activity since the date my account was opened.  This can be found by clicking “Understanding Your Traded Note Returns” which is listed below your Traded Notes returns.

In the below screenshot, my returns are listed using my adjusted net annualized return.  I assume a loss estimate of 25% for notes in grace period and 100% for all others.

An adjusted return just shy of 4% on these notes is pretty disappointing given that my overall return still is above 10%. Out of the 247 notes I’ve purchased, 6 are 31-120 days late.  Only 2 of these that are late have not been sent to an external collections agency.  Judging by the collection logs and the falling FICOs, I don’t anticipate recovering much from these notes.  Perhaps when purchasing some of these notes I was more lax with my criteria due to the sparse availability.

 

With that being said, I’m hoping to see my returns keep creep up as the people who have been paying continue to do so.  At this time, I’m not actively looking for more notes on FOLIOfn using this strategy.  Part of the problem with this strategy is that it takes time to look through notes and it’s rare to see notes meet these criteria.  This strategy works best when you see someone liquidating their entire account at a discount.  I also wouldn’t be surprised if there were many automated programs combing FOLIOfn constantly for mis-priced loans or for notes that meet strategies like this one.

Some people might be wondering why I didn’t try and sell these notes when they first started to go late.  One reason is that it is such a small portion of my portfolio and the other is that I am trying to avoid any more headaches come tax time.  This is one area where I hope to see Lending Club/FOLIOfn make some improvements.  I don’t want to have to calculate gains/losses manually and then submit it to my tax preparer.

I plan to provide a final update on this strategy once the notes reach maturity in 2015.