Mintos have launched new auto-investment strategies
In 2018 Mintos launched its ‘Invest & Access’ feature which allowed investors to have their investments performed automatically by a Mintos algorithm. It proved popular, with around 50% of investments being made via Invest & Access. At the time, we saw quite a few flaws in the way Invest & Access worked, and published a post about what the potentia downsides were. To some extent we feel that our concerns have proved accurate, as many investors have reported poor performance and unexpected portfolio allocations. Problems have included high levels of defaulted and suspended loans, lack of diversification, lower than expected interest rates, and longer than expected maturities.
Mintos seems to have accepted that the Invest & Access feature was not working well, and has now replaced it with three new strategies called Diversified, High-Yield, and Conservative. Below we highlight some of the key features of each, and what the potential problems with each are.
The new strategies are better than Invest & Access, but we still think there are many problems that need highlighting. The main issue we have with all of the strategies is that they will, in our view, end up investing in many loan originators that are at high risk of default. Even the ‘conservative’ strategy invests in loans with Mintos ratings as low as B-. Mintos tends to only give ratings below B- shortly before loan originators are suspended or default, which means that we don’t think the ‘conservative’ strategy will generate a conservative portfolio.
We see even bigger problems with the ‘high yield’ strategy. This strategy will buy pretty much any loan as long as the interest rate is higher than average. But constructing a portfolio with a high average interest rate, is unlikely to generate high investment return once defaults are considered. There’s a high risk that this algorithm will effectively act as the Mintos garbage truck, that buys the loans that no one else wants to buy, because the risk is too high.
Some other issues apply to all strategies, including the (most popular) diversified strategy. For example Mintos does not guarantee that the algorithm will select the loans with the highest rates available from each loan originator. There are also no restrictions around minimum interest rates, or maximum loan maturities. In short, investors are asked to place a lot of faith in the algorithm, without really knowing how it works, and whether it will select loans that meet their expectations. In fact, we’ve seen comments from some investors who have used these strategies, that things have often not gone to plan. For example, one investor was surprised to see that she had purchased a loan with a seven year maturity.