Trine has recently enhanced its investors' dashboard by introducing the Annualised Return metric for each loan and an investor's entire portfolio. This addition aims to provide investors with a more transparent and insightful view of their investments' performance. Here, we delve into what Annualised Return entails, its significance, and the way Trine calculates it for its users.
What is Annualised Return?
At its core, the Annualised Return metric utilises the Internal Rate of Return (IRR) calculation, offering investors an estimate of their investments' performance. Specifically, for credit products like those offered on Trine, this calculation provides an annualised rate of return that accounts for the complexities of lending, such as the time value of money, net of fees and defaults. It essentially reflects what an investor can expect to earn or has earned on an annual basis, making adjustments for the timing and magnitude of cash flows associated with loans.
Limitations of IRR
While IRR is a powerful tool for estimating returns, it's not without its limitations. A key limitation of the IRR is its sensitivity to the timing of cash flows. Small changes in the timing of cash inflows and outflows can lead to significant variations in the calculated IRR, making it a somewhat volatile measure in scenarios where cash flow timings are uncertain or can vary from the projected schedules. This characteristic necessitates a careful and nuanced interpretation by investors, especially in the context of investments where future cash flows are not guaranteed or can be irregular.
Trine's Approach to Calculating Annualised Return
Trine's approach to calculating the Annualised Return aims to be as simple as possible and encompasses:
All past cash flows that have already occurred.
Scheduled future cash flows for loans that are either current or have been successfully restructured.
For unhealthy loans that have defaulted, are in best effort recovery, or are undergoing restructuring, it is assumed that there will be no future cash flows.
It's important to note that Trine does not consider the reinvestment of interest as a compounding effect in the IRR calculation. A reinvestment of interest is considered a new investment.
Since Trine mainly offers fixed-rate loans, the maximum possible annualised return for a loan is inherently equal to the interest rate of the loan itself.
To further aid understanding, the platform offers an overall annualised return at the bottom of the dashboard summary. This overall return is calculated based on the entirety of an investor's past and scheduled future cash flows, providing a holistic view of the portfolio's performance.
Please note that in cases where a loan is unhealthy, the annualised return might not be displayed, as the return could be too small to be rational. However, these cash flows are still factored into the overall weighted average, ensuring investors have a comprehensive view of their portfolio's performance.
Moreover, it's expected that more recent loans or those without any restructuring will closely mirror the loan's interest rate. Slight variances may occur, sometimes even resulting in slightly above the interest rate due to specific payment timings from borrowers.
Investors are welcome to request the scheduled payments for their portfolio if they wish to perform their calculations, where they will be able to use more or different assumptions for future cash flows as they wish.
If you have any questions, we are here to help. Reach out to us at hello@trine.com.