When investors login to their Prosper account they are greeted with a box similar to the one above. If you have been investing for more than 10 months then you will likely see two numbers in the Annualized Return box: Seasoned Only and All Notes. What is the difference?
Prosper believes that a note becomes “seasoned” once it is 10 months old. This seemingly arbitrary number of 10 months is based on their research of determining when a loan is likely to become stable – in that the likelihood of a default diminishes. While not all defaults occur in the first 10 months Prosper’s opinion is that this is a good cutoff number to provide for investors.
Here is the official explanation from the Prosper site:
The return that you earn on your Prosper investments is based on the lifecycle of the underlying Notes. Because a Note cannot default until it’s missed five payments, your return for the first four months will be based entirely on those loans that remain current. This can result in a temporarily higher return than should be expected for young portfolios.
As Notes age, you may see initial defaults between their fifth and ninth months – based on our own research, our Note returns show increased stability after they’ve reached ten months of age. For that reason, we define “Seasoned Return” as the Annualized Return for Notes aged 10 months or more. We encourage you to pay closest attention to your Seasoned Return when evaluating the performance of your portfolio.
Seasoned Returns Will Be Closer to Your Long Term Return
I actually like the seasoned returns number because it eliminates the artificial bump that investors get from having a young portfolio. My seasoned returns (shown above) have typically been 3-4% below my total return and I believe it gives me a better indication of my long term returns. My goal with my Prosper account is a 15% return and the seasoned returns number lets me know if I am on track with that goal.
But I do wonder if it confuses casual investors to see two different return numbers there. Lending Club ignores the concept of seasoned returns and just displays the return for all your notes including the brand new notes in your portfolio.
The concept of seasoned returns is consistent throughout Prosper. You look at their home page and they show a seasoned returns number (10.02% as of today) and this is displayed throughout their marketing material. In essence they are trying to give the investor a more realistic expectation of what they can expect going forward. One point to note is that the return numbers on Prosper are not updated every day. They were being updated weekly for most of this year but since June it has looked like they have gone to a monthly update. I would like to see a consistent update schedule, at least on a weekly basis, so investors can see how they are doing.
What do you think? Is having two separate return numbers confusing or do you like seeing the different numbers? As always I value your opinion so please let me know in the comments.
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.