Dozens: Overall Update + Community Changes

@AC I remember you mentioned that the fund risk rating in Dozens invest are calculated based on their historical volatility in the virtual meeting between community members and Dozens. At the time of the meeting I didn’t think too much about it, but now I’m actually thinking about it, the method itself is not bad, but judged by the outcome of the risk ratings, Dozens might have done something really wrong with the method.

Let’s go back to the example I mentioned in the virtual meeting - the US Treasury Bonds (Vanguard USD Treasury Bond UCITS). I remember I said that this fund is going to have equity-like volatility and bond-like return, and you corrected me saying that the fund risks are rated based on their historical volatility, which means a fund like what I’ve described wouldn’t have the risk rating 2 of 5. This sounds sensible without thinking too much about it. However, as soon as I checked the index the fund’s KIID, I realised that the fund only had 4 years of history returns (since 2017), and they are all positive without too much swings. This immediately made me worried about how did you calculate the volatility of the fund.

My first reaction to that is, you could have calculated it based on the available history of the fund itself - 4 years of data, which will be very very wrong. To proof whether I’m right about the assumption, I pulled the data of the intermediary US Government bonds data from here (ITT in the spreadsheet), which is the data closest to the index the fund tracks. I have also pulled the exchange rate data from here in order to convert the data to British Pounds for UK based investors.

After analysing the data between 1950 and 2020 - 71 years of data, I got the following results:

  • Standard deviation in USD is 7.2 and in GBP is 12.6 - three-quarters higher than in USD
  • Max 1 year drawdown in USD is -4.9% and in GBP is -7.9% - more than three-fifth worse than in USD
  • Max drawdown (over 1 or more years) in USD is -4.9% and in GBP is a staggering -12.3%
  • Yet, the 71 years annualised nominal return in USD is 5.64%, and in GBP is 5.67% - only 3 basis points difference!

Off-topic: unless the investor has future USD liabilities, I cannot think of a single reason for someone in the UK to invest in the currency unhedged USD government bonds. The investor would be taking uncompensated currency risk if they do that, and the result would be exactly what I had described - equity-like volatility and bond-like return.

Now, let’s get back to the topic. I don’t think Dozens will rate a fund at risk 2 of 5 if you knew the fund’s value had dropped nearly one-eights in the past. If my assumption is correct and you are calculating the volatility based on short term data, I would worry many “low risk” funds on the Dozens invest shelf are suffering from the same issue. If the above is true, I would strongly recommend you to reevaluate the risk levels of all funds in Dozens invest which has a risk rating at 4 or below using a much longer time frame. 30 years is a good starting point. An appropriate alternative should be used for funds with a short history. Many funds may be riskier than what you had initially thought.

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Sorry to have missed it! Keen for any feedback from anyone there 🙇‍♂️

In other news, I’m watching the Google keynote and the new Android UI is very sympathetic to the Dozens direction of travel…

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Hi Roman,

Like our chat yesterday, this is a lot more complex and follows a lot of analysis and product governance.

While a lot of this isn’t public, I can point you to SRRIs in the UK - google this up, and know that all our assessments follow this industry standard, and effectively map our ratings to these published SRRIs. In other words, we don’t have the privilege of setting these calculation parameters or variables like historical duration. We simply own the risk assessment for the individual, that then gets applied and mapped to standardised SRRIs.

If you would like to continue the more theoretical discussion of how SRRIs should be calculated (given that we don’t control it), Suzanne (a Director and MLRO at Pi, but also a surgeon, derivs delta one structurer, lawyer and therapist in her spare time!) is a great person to chat with. @RobD can put you in touch.

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Hello @Sandesh and @Tatia_K :wave:

I was just wondering if the plan is still for you to give us a little of your time, or whether things have moved on?

Very sorry if this has been discussed and I’ve missed it!

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I have no intention of diving into the technical details about SRRI. But it’s worth mentioning that SRRI does not take the currency risk into consideration if the underlying assets (e.g.: US Treasury bonds) is in the same currency as the fund (e.g.: the Vanguard USD Treasury Bond ETF), regardless of the investor’s home currency. That’s because a fund simply doesn’t know what is their investors’ base currency. As the result of that, a very low SRRI (1 of 7) fund in USD can be mostly a flat line for an US investor in USD but very volatile for a British investor accounting in GBP. This is just one example why the SRRI alone is not good enough to evaluate the risk of a fund for a specific (group of) investor.

Since Dozens only serve British investors (for now), you should adjust the risk based on British Pounds if the fund’s base currency is something else. Although, I have to say that I’m unsure if this violates the regulatory requirements. The regulations sometimes make no sense to me.

Or, a much better approach is to replace that fund with a currency hedged version of the same thing, and all the problems goes away. GBP investors will get the same volatility as the USD investors, usually at the expense of only a slightly higher OCF. Generally speaking, it usually makes sense to use currency hedging for international bonds, and most investors should do this if they buy international bonds fund.

Roman, as confirmed to you on the call, Dozens ratings are currency adjusted to the extent possible, so we are aligned.

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Hi @peter

We’ll be bring you some more updates from @hannah , @Sandesh and @Tatia_K in the coming weeks :slight_smile:

Also, AC won’t be available for the next few days as he deals with a Covid-related situation at home. All ok, but keep your questions coming in and he’ll be back next week.

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Thanks, Rob. And best wishes to @AC and family.

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As promised, I’d like to share the first half of our latest Community meeting with you all.

@julia talks us through a little more detail around the process that lead to our new app designs, and I’m sure she’d be happy to take any further questions you may have on this.

It was great meeting you @Roman and @mimote Thanks for your valuable feedback.

We’ll hopefully be making this more of a habit moving forward, so don’t worry if you missed out this time.

I’ll share the second half (with investment chat) soon. Enjoy :slight_smile:

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Thanks so much for sharing this - it’s very nearly my dream app :heart_eyes:

(Now, how do we get you sustainable funding?)

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I really like the look of the app. It looks really polished.

However, disappointed to see there still appears to be uncertainty as to how the GIA/ISA separation will be handled. I don’t really understand what the difficulty is. Other platforms have been handling it easily for many years with a simple drop down menu or toggle. For example, once you enter the Investments portion provide a way to access either GIA or ISA view to see investments and invested cash within each account. Similar for Savings portion of app if you start offering cash ISAs.

Also, I don’t see evidence in the video or screenshots of a transaction history in the Savings or Investments portion of the app, which is an issue with the current version of the app.

Finally, although Dozens bonds have been discontinued, the last bond that was released will not mature until end of Sept 2022. Where will existing bonds be housed in the app? I know in the current version of the app they are in Grow because that aligns with your thinking of what they represent. But from a practical perspective, since they can be part of your S&S ISA (rather than a cash ISA) I would suggest it is better to have them in Investments portion of the app.

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This has been a head-scratcher from day one and there’s never been a reason given. It will be quite a shock if it’s not changed now…

Hey gang! Sorry for the absence - 2021 continues to not disappoint for action at home and work. :slight_smile:

@Gaoler I agree with the head-scratcher comment - so of course the split will definitely be there - just not in these screens yet. Not sure how we quite got there but there was a seemingly unresolvable backend issue to the way we had architected the accounts in the old system but the feature will definitely be there for new designs and in fact maybe there on old designs soon!

Will revert back to all that I missed tomorrow guys, and Tatia+Sandesh+Hannah updates coming up too.

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No need to apologise. I hope that everything is better with you!

Looking forward to these!

So, WRT to Black. Old Rob discussed me being a tester and paying the fee to see it worked (with the idea of being reimbursed later) soo what timescales are we looking at? Similar to my Proton subs I have no issue paying for a model that I buy into for some benefits.

I read about the P2P lending plans; it may sound great on paper; however, there is only one issue: lending using a Fractional-reserve currency rather than 100% reserve backed.

It is one reason why the cryptocurrency has proven popular, as people know their fiat money is devaluing over time. Crypto has demonstrated it is secure, but sadly its price against fiat is based upon buying and selling; as such, the currency’s price is highly volatile but has proven over time does increase in value. Also, it is outside the control of the government and one reason why the Bank of England is now starting a crackdown.

The government has spent money that has not existed, and now we all see the price. First, prices have increased, many getting salary increases over 10%+ for those near the top of the career ladder. Second, if you are at the bottom of the career ladder, you have to pay the price increases but last to see your earnings increasing.

Remember, the money being lent out is money that does not exist; you put £10 into a bank, the bank can lend out £90, but you can still take that £10 out of the bank even the bank has lent that money out to someone else multiple times over.

Now, Dozen is a money provider, not a bank; they have to use a FIAT currency but act as a 100% reserve bank. So you may have money in Dozen, but the money is slowly devaluing. Dozen may provide a P2P service, but it ignores the risk that money being lent out is depreciating over time. We are paying the price of failed banking model but also take the risk of those companies taking a p2p loan not being able to pay back the loan.

If the P2P lending was a 100% reserve currency, then I agree the concept is workable; maybe consider your own virtual currency something that Tally has done, maybe the virtual currency linked to the performance of the UK economy.

Apologies for the delay guys - of course there is only one topic that is more important than you, our best customers, and thats our longer term funding! Pleased to report positive traction on some exciting news for now, and ask for a little more of your patience before I can reveal details (cup and lips et al).

Will revert asap.

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Just fyi, the app issues right now are being looked into urgently - no connection to this topic! Update: Fixed already.

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Currently crossing most things that I have two or more of for you.

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Hi @jgw2001 , I agree with you that P2P lending is unlikely to be a good investment product. However, I don’t agree with your supporting points.

Disclaimer: at the time of writing I do not hold any cryptocurrency or digital currency, and do not have the intention to buy or hold any of them.

First, I do not agree that “100% reserve backed” lending activity is bad for the lender. The market knows the inflation risk, and the risk is baked in the price of the investment. For fixed term lending, this is reflected in the interest rate. The higher the expected rate of inflation is, the higher interest rate the lender will demand from the potential borrowers before they choose to lend out their money.

Second, cryptocurrency certainly hasn’t been demonstrated as being secure. Events like digital wallet theft and accidentally losing access to large sum have been reported in the past. If those had happened with traditional banks, the customer would have been reimbursed for the loss or helped regain access to their money. But people and companies are left on their own if they had held cryptocurrencies.

I also strongly disagree that cryptocurrency has been “proven over time does increase in value”. The history of it is way too short to say anything definitive about it. What we have observed over the last decade is such a short time for an asset class or an investment. You could take a snapshot of the S&P 500 for the 10 years period starting from January 2000 and say it is a bad investment, because it hasn’t increased in value at all. However, the conclusion will be totally different if you had look at a different 10 years period.

Also, I need to remind you that “the Bank of England is now starting a crackdown” (on cryptocurrency) is a completely false statement. The Bank of England has never done that, is not doing that and will not do that. It is not the central bank’s role to crackdown on a currency or an investment, depends on how do you view it. The central bank’s roles are: 1. provide the price stability of British Pounds by keeping inflation stable and low, and monetary policies is their main tool to do this; 2. regulate financial institutions to keep the financial market stable, setting lending standard and stress testing are their main tool to do this; 3. they are also responsible for printing the bank notes. What they don’t do is regulating any other currencies (be it cryptocurrency or foreign fiat currency), nor do they regulate any investment products (that’s the Government and the FCA’s role). In countries where there had been a crackdown on cryptocurrency, central banks had never been involved. It has always been the Government or other regulatory agencies’ role.

Third, I also disagree that “The government has spent money that has not existed, and now we all see the price.”. In fact, the Government isn’t the only one spending the “money that has not existed”, the people and businesses who’s been borrowing money from commercial banks are too. On the scale of spending the “money that has not existed”, the Government is so small comparing to all the people and businesses combined. Yourself have said that “the money being lent out is money that does not exist; you put £10 into a bank, the bank can lend out £90”, so you clearly knows the £80 lent to people and businesses had never existed, and it’s only logical that the people and businesses who borrowed the £90 would have spent most if not all of it. In fact, the currently higher than usual (by saying usual, I mean the last a couple of decades) rate of inflation is not the result of borrowing (by the Government or businesses), but the result of supply chain issue. The HGV driver shortage has pushed the price of many products up, but the goods themselves are not in shortage, it’s only the supply chain issue causing them unable to reach the consumers. Another big part of the inflation comes from the rapid rising energy cost, which is due to multiple factors such as low gas reserve and low renewable output, but I have to point out that excess supply of money is not one of the contributing factor.

And, last, we don’t need another virtual currency, be it cryptocurrency or digital currency, to engage in lending activities. It’s a terrible idea. Without the big central bank supporting the price stability, both the lenders and the borrowers are exposed to the price (exchange rate) risk. If as you said, the virtual currency is linked to the performance of the UK economy, which I assume is GDP, by April 2020 the GDP went down by nearly a quarter. Imagine that you, as an investor, all outstanding loans were repaid in full at that time, how do you feel about it? You would have lost a quarter of your money overnight and it’s completely outside of your control. There’s nothing you can do about it, because the borrowers have the right to make early repayments. The reverse is also true, if the economy booms, businesses will go bankrupt because they can no longer afford to repay the money they had borrowed. In fact, if you have read a bit about business risk management, one of them is about currency risk. The risk arises when your liabilities are in a different currency than your assets and profits, and business schools would have told you to hedge the currency risk. By borrowing in a currency different than British Pounds, assuming your assets and profit are in British Pounds, you would be exposing your business to the currency risk for no good reason. No sane business would do that, unless they see an arbitrage opportunity in it.

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