Could this relatively new asset class offer better long-term returns than shares, with lower risk beside?
To compensate for the risk of shares, the market always tries to price them to provide an ongoing return that exceeds that of less risky investments. Hence, over the long-term, shares have always come back eventually to soundly beat the returns offered by cash and bonds.
We shouldn't expect a change in the order of performance of the different asset classes. They are linked to the performance of the same companies, and to the same national and global economies. If shares are dead forever, as many gloomy Fool readers have commented, then bonds and cash are moribund and soon to be even deader.
A new asset class
That's how I expect old asset classes to perform long term. But move over, ancient ones! We have a new asset class with the entry of Zopa. (It's new relative to bonds, shares and certainly cash.) To many, it's still just an intriguing, ethical idea that enables people to lend to other people, removing the banks from the process. To others, it's a huge opportunity to make a fat pile of cash.
Zopa allows you to be your own bank. Not in the modern "let's lend 80 times more than we've got to every illiterate homeowner and businessman we can find" kind of way, but in the sturdy and traditional "sacrifice a tiny bit of savings interest and charge a fat load of credit interest" way. It's a long-term, profit-building bank instead of a global-crisis generating one.
Another reason why it's better to own this bank instead of High-Street Bank Plc is you have no staff to look after with their costly defined-benefit pensions, and you have no shareholders to keep happy and pay dividends to. You take all the profit yourself.
Zopa currently offers around 9% returns on average (before bad debt, although that is very low due to its strict lending criteria). When the economy grows again, along with inflation and share prices, so should the return your bank gets. Banks will raise credit interest rates and so will you and Zopa.
It's about money, not ethics
You're not supposed to hop around trying to maximise your Zopa returns. It's supposed to be about ethics, but a new, exciting asset class isn't going to remain in the control of people whose primary interest is helping others for very long. Inevitably profiteering will win.
With Zopa you have to buy and sell in order to get the best prices. One Fool commented that by doing so he was averaging 10.4% returns. Beating other investors by more than 1% makes a seriously big difference to your long-term returns. How soon will it be, then, before there are Zopa arbitrage programs, which will buy and sell Zopa loans at the best prices automatically?
The future of lending
And when will competitors arrive offering the same service? If Zopa and others start lending to businesses and, dare I say it, to sub-prime borrowers, it'll increase awareness and interest in this asset class further. Indeed, a growth in Zopa-type borrowing may be just one more reason not to bet on banks. Greater competition for Zopa will surely follow, and this will force their loan prices down, lowering the returns that this new asset class offers.
In the end though, shares will have to justify their extra risk by being priced to perform better than Zopa over most longer periods., Over very long periods of 30 years, say, they'll always have to perform better. Most of my money is in shares, but with returns from Zopa running at 9%-10%, returns on shares are going to have to improve on their recent form quite significantly if they're going to win this particular race!
You can see what other Fools think of Zopa on this discussion board.
