What is XIRR?
Lendwise displays XIRR as a return measure for Lender returns. XIRR stands for eXtended Internal Rate of Return and is displayed on the top right hand side of your investor dashboard.
XIRR gauges the annualised rate of return from the time of your first deposit until today. The formula is conceptually similar to IRR (Internal Rate of Return) with the advantage being taking into consideration non-periodic cashflows.
Why did Lendwise choose XIRR as a return statistic?
Lendwise chose XIRR as a return statistic as it takes into consideration fund inflows and outflows in its calculation and is a standardised method which you can easily replicate on your own computer using an Excel or Google Sheets spreadsheet. The standardisation also allows you to benchmark your Lendwise returns with other investments you may have.
An XIRR calculation worked example
A Lender deposited £10,000 in their Lendwise account on 6th March 2019. They then setup their Autolend portfolio to invest in Lendwise Loans with a maximum of £100 per loan (to achieve a very wide diversification and minimise the loss of risk in case of arrears or defaults of a single loan). Over time their Autolend portfolio has invested initially in 100 loans and reinvested proceeds from instalment payments as they occurred.
Furthermore, on 4th December 2020 they withdrew £2,000 from their Lendwise account and invested £9,000 more on 20th July 2021.
Today they have a portfolio value of £19,123 in 227 loans and 1 loan with outstanding balance of £69.30 in default status.
It would be quite cumbersome to calculate the total return of the Lender for each and every loan considering each and every payment made – and even more cumbersome for the Lender to individually perform the calculation themselves.
Using XIRR we have the following inputs:
|22/11/2021||£19,123.00||Gross Portfolio Value|
|22/11/2021||(£69.30)||Defaulted Loan Balance|
XIRR calculates a result of 6.87% on an annualised basis.
On an excel or google sheets spreadsheet the formula can be called in the following manner:
XIRR(Values Range, Date Range)
To avoid errors remember that the values must be stacked in a date sorted manner (earliest to latest) and that there must be at least one positive and one negative value.
It may be initially confusing or non-intuitive for deposits to have a negative number sign but it makes sense once you visualise an investor taking the funds out of their pocket and investing it on the platform. In a similar manner, a withdrawal has a positive sign as the investor withdraws the money from the Lendwise platform and transfers it to their bank account.
What drives XIRR higher (or lower)
Whilst not directly shown in the above example the single most important driver of a higher XIRR is interest repaid (or accrued).
Don’t rush however to place all your funding instructions on the loans paying the highest interest rate. The interest rate is more likely than not a signal of the credit risk of the borrower.
The optimal strategy is to use an Autolend robot to divvy up your investment amount in the maximum number of loans possible, ensuring that funds are diversified and that single loan risk gets minimised as much as possible.
From this it can be deduced of course that Defaults drive XIRR lower.
Leaving your money uninvested also drives XIRR lower (or at least does not drive it higher). Often defined as Cash Drag, money deposited in P2P account that is not invested is not earning anything. As a simple example if a Lender deposited their £10,000 but did not invest them – their portfolio value would be £10,000 today – resulting in an XIRR of zero.
So in a nutshell in order to achieve the highest possible XIRR (without introducing additional credit risk in your investment portfolio):
- Use an Autolend Portfolio to automatically invest the cash you have transferred in your Lendwise Investor Account. This very important step has two benefits:
- Cash Drag is minimised as the Autolend robot will invest any uninvested cash as soon as there is a matching opportunity to the Autolend portfolio parameters.
- Maximum diversification is achieved minimising the credit risk of a single loan defaulting.
- Use the secondary marketplace to sell loans sparingly – and when needed as part of a portfolio strategy change or need to liquidate your investments to access cash in a readily manner. When loan parts are sold on the secondary marketplace there is a fee charge, which drives down returns.