You walk into a bar.........
The bar is popular. Many people go there. It’s a great bar. You’re with a friend who has a lot of experience making and serving cocktails.
The bar owner greets you and says you have two choices. You can choose whatever drinks you want tonight, or you can leave it to him, and he will choose. The second option sounds a little exciting, and makes life simple. It seems reasonable.
But what if I told you that the bar owner is running low on supplies. Deliveries had been running late and all the regular customers had been buying all the most popular and best drinks as soon as supplies arrived. He’s completely run out of many of the most popular spirits, and is running very low on a lot of other drinks. However he has been trying for years to reduce his inventory of Blue Curacao, Cinnamon Aftershock and Mint Campari.
Do you think he will serve you the absolute best drinks possible, or the ones that help to clear out his inventory?
You decide to choose your own drinks. The bar owner isn’t very happy so he comes back – he’s offering you a 2% discount if you let him choose the drinks! Would you take that deal?
That's pretty much the offer Mintos are making investors right now
Mintos are encouraging investors to put money into one of three ‘investment strategy’ products. They are marketed as providing easy diversification across many of their lenders. Mintos are offering 3 products – ‘short term’, ‘diversification’ and ‘secured’. The major flaw with each of these products is that investors will receive loans that Mintos are not having much luck selling on the primary market. They will be their ‘Blue Curacao’ loans. And why are some loans loans a lot more popular than others on Mintos? In our view, it’s because there is a very wide range in quality between the lenders, as seen in our Mintos lender ratings. There’s a major risk that these products act as the ‘garbage truck’ where loans are dumped that no other Mintos investors want to hold.
Adverse selection is not the only issue
The short term product can be allocated loans with interest rates as low as 8% and also include loans without buyback guarantees. We think there is a lot of supply of short term loans with buyback guarantees, so there is no reason for investors to risk receiving exposure to loans without these guarantees. The 8% minimum rate also seems very low.
The diversification product gives Mintos the ability to allocate any loan available on the platform. This can include loans with very long maturities (up to 6 years) and all loan types, some of which carry high risk, such as unsecured business lending. Mintos are currently offering a 1% cash-back for investors who use this strategy and we are not surprised – getting rid of unpopular loans has a very high value for them. The only benefit we see to this product is that it will spread risks very widely across many loans and lenders on the Mintos platform.
The secured loan product is probably the least worst of the three. It offers exposure to secured loans with a maximum of 75% LTV. However we think that there is a big advantage to manually selecting secured loans in most cases. That’s because the quality of the collateral is important, and it can also be helpful to review borrower payment histories.
What is a better approach?
We think a much better approach is for Mintos investors to create their own, tailored investment strategy products using the auto-invest tools available on Mintos. Our guide to auto-invest tools explains how to use them effectively. It is very easy to create some auto-invest portfolios that replicate the investment strategy products that Mintos is marketing. In our view, the most important thing is selecting the lenders that offer the best balance of return and quality. That’s why we recently launched our Mintos loan scanner. We think that this can help investors to create portfolios that will offer higher returns and lower risk than the Mintos products (even after cashback).