Advanced Investing: Current Yield Investing Landscape

Recent stock market volatility and low interest rates have prompted investors to seek alternative options for portfolio diversification. This environment has led to investors having to choose between investments that either have a significant reduction in yield or an uptick in risk. Historically investors have had the following options:

  • Publicly-traded bond funds
  • REITs
  • CDs and Short-Term Bonds
  • Municipal Bonds
  • Business Development Companies (BDCs)

     Investors that meet the capital requirements have a few more alternatives:

  • Mezzanine funds
  • Private equity funds
  • Hedge funds

Advances in technology and regulation have created opportunity for other yield investments to thrive. The prevalence of consumer lending marketplaces over the last several years, such as LendingClub and Prosper, have provided investors with the opportunity to access higher yielding investments through the direct lending consumer marketplace. Amendments to Title III of the JOBS act have sparked a wave of real estate debt and equity crowdfunding marketplaces, promising investors great returns in the real estate market. 

napkin-risk-return
Source: New York Times, Carl Richards; “Napkin Sketches” from the NYT “Bucks” blog.

The yield investment landscape has a variety of options that service investors across the risk spectrum, none of which are without their shortcomings.

The consumer marketplace lending space has rapidly grown and garnered the attention of the investment community, especially with the $1B+ IPO of LendingClub. On each of the consumer platforms, investors are given the opportunity to evaluate each loan based on credit score, employment history, debt-to-income and other consumer debt metrics. Each loan is priced according those metrics and investors are given the opportunity to build a portfolio of loans that fits their risk appetite. One important characteristic of marketplace lending is in the event of default — the marketplace lenders typically have a challenging road ahead when attempting to recover from their defaulted borrowers. This is just one portion of the yield investment landscape; the graphic below provides a glimpse into both the upsides and downsides of each investment.

yield_investment_landscape

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