When we released our mobile application, LendingRobot Dashboard, many users might have noticed that the first screen to appear after logging in displays your portfolio’s health. In this article, we’ll give an explanation of portfolio health, how it is calculated, and its potential use in gauging portfolio performance. We consider Lending Club as our example platform.

We start by presenting our equation for portfolio health:

$Note \space Health = \left(1-\frac{Days\space Late}{120}\right) * 100\%$

$Portfolio \space Health = \sum \limits_{i=1}^{n}Note \space Health_{i} * \omega_{i}$

Where $n$ is the number of ongoing (not paid or charged off) notes in the portfolio, $Note \space Health$ is the individual health of note $i$, and $\omega$ is a weight calculated as the remaining outstanding principal for note $i$ divided by the portfolio’s total remaining outstanding principal. Notice in the equation that if a note is 0 days late then it has a health of 100% whereas if it is 120 days late it has a health of 0%. The note health decreases linearly as days late increases from 0 to 120. Also, it is possible for notes to be more than 120 days late when they have the status of default but have not charged off yet; we count them as being 120 days late and having 0% note health.

Let’s clarify this with some examples. First, imagine that you have a portfolio of only one note with the following characteristics:

Note Term Subgrade Age (months) Status Days Late Note Health (%) Remaining Outstanding Principal ($) Weight ($\omega$) Weight-Adjusted Health (%) 1 36 D5 18 Grace 3 97.5 20 1 97.5 Note 1 Total Ongoing Portfolio Remaining Outstanding Principal ($) 20 20
$\omega$ 1 1

The portfolio health in this case is 97.5%; exactly the same as the sole note’s weight-adjusted health. This is because the entire portfolio is comprised of that single note.

Now consider a hypothetical portfolio consisting of 6 notes with the following characteristics (weights are rounded):

Note Term Subgrade Age (months) Status Days Late Note Health (%) Remaining Outstanding Principal ($) Weight ($\omega$) Weight-Adjusted Health (%) 1 36 D5 18 Grace 3 97.5 20 .278 27.11 2 36 B1 30 Current 0 100 8 .111 11.11 3 36 G3 12 Late 87 27.5 21 .292 8.03 4 36 C4 8 Default 143 0 23 .318 0.00 5 36 F2 50 Paid 0 100 0 N/A N/A 6 36 E5 60 Charged Off 0 0 19 N/A N/A Note 1 2 3 4 5 6 Total Ongoing Portfolio Remaining Outstanding Principal ($) 20 8 21 23 0 19 72
$\omega$ .278 .111 .292 .319 N/A N/A 1

The portfolio health for this portfolio is 46.25%, the sum of the weight-adjusted health column excluding N/A values. Again, our process is finding every ongoing note’s health, weighting the note health by its weight based on remaining outstanding principal, and summing up the resulting weight-adjusted healths. Again, note that notes 5 and 6 are not included in the portfolio health calculation because they are not ongoing notes.

So aside from being an indication of how late your ongoing portfolio of notes is, how else can portfolio health be used? You could use it as an indication of how your current investment strategy is performing. Consider the second sample portfolio above; where notes 1 through 4 are included in the portfolio health calculation. We can analyze the historical data we have about Lending Club loans and find an expected days late based on loans that match characteristics of those in your portfolio, and with the expected days late we can calculate an expected portfolio health. If your portfolio health is greater than the expected portfolio health, it indicates that your portfolio is “not as late” as we’d expect based on historical data and is performing better than average. Here’s a snippet of fictitious data for comparisons with the example portfolio above:

Term Subgrade Age (months) Expected Days Late Expected Note Health (%) Weight ($\omega$) Expected Weight-Adjusted Health (%)
36 D5 18 8 93.3 .278 25.94
36 B1 30 1 99.2 .111 11.01
36 G3 12 40 66.6 .292 19.45
36 C4 8 50 58.3 .318 18.54

In this case, we have an expected portfolio health of 74.94%. We can see that our example portfolio’s health (46.25%) is worse than expected, and is largely due to notes 3 and 4 where the actual days late are much greater than expected. This could be an indication that whatever rule or investment strategy that is picking 36 term G3 and C4 notes might warrant reconsideration. Thus, we believe portfolio health has potential in gauging your portfolio and investment strategy performance.