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Fintech: hype or structural growth trend?

Fintech: hype or structural growth trend?

25-06-2018 | Interview

Fintech is hugely popular among both professional and retail investors. Since Robeco’s Global FinTech Equities strategy was launched on 17 November 2017, clients have entrusted it with over EUR 250 million (USD 290 million) in assets. We talked to Patrick Lemmens and Jeroen van Oerle, the strategy’s portfolio managers, about the appeal and risks of this nascent industry.

  • Jeroen van Oerle
    Jeroen
    van Oerle
    Portfolio Manager
  • Patrick  Lemmens
    Patrick
    Lemmens
    Portfolio Manager

Speed read

  • Clients strongly believe in the investment theme
  • Performance has been very attractive
  • The strategy is a natural hedge to rising interest rates and volatility

How do you explain the significant interest in the strategy?

“Fintech is a powerful growth trend, which will be there for many years to come. The digitization of the financial industry offers many investment opportunities. At the same time, only a few quality offerings are available to investors. Fintech’s performance potential is very attractive. The net return of our strategy since its inception is 16.3%, against 4.4% for the MSCI All Country World index1.“

Surely it’s not without risks to invest in such a young sector?

“Indeed, it’s crucial to be critical and selective. We do not invest in hype stocks and when innovation is still at an early stage (such as with blockchain) we will invest in companies that provide the tools to make blockchain investments. We are also cautious with fintech companies that are active in on-line lending and Robo-advice and that are not making profits. It’s very difficult for such stand-alone companies to achieve adequate scale, as customer acquisition is very expensive to them.”

How do you add value in a double-digit growth industry?

“We apply a three-step investment process:

  1. We identify attractive long-term trends from which we derive the fintech universe.
  2. The portfolio consists of three distinct segments with different performance characteristics. This provides diversification. The three segments are: Winners, Enablers and Challengers. Winners are well-established companies that clearly stand out from their peers. Challengers are younger companies that have the potential to become tomorrow’s winners. Enablers are companies that help the financial industry to develop and implement technology.
  3. We build a portfolio from stocks in the investment universe, distributed across the three segments. The size of the investments is based on the ability to execute the fintech trends, proprietary Robeco quant scores and relative valuation appeal.”
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Blockchain, alternative lending, capital markets. What has the future got in store for fintech?

“Honestly, it is quite difficult to give a short answer to this question. However, we believe that:

  • Online payment methods will become mainstream, cash an exception
  • Digital finance will open the way to two billion people who currently don’t manage their financial affairs
  • Cooperation is key, as incumbents need the technology and fintech companies need a customer base
  • Not getting cybersecurity right in the financial world simply means going out of business
  • China and India are set to become larger in listed fintech than the rest of the world combined

The new EU Payment Services Directive 2, which came into effect in January 2018, can give a substantial impulse to fintech. Clients can allow banks to make their data available to other parties (including other banks), which can then offer them additional products or services. As banks will gain more information about their clients, the shift towards financial platforms accelerates.”

You recently said that “Fintech provides a natural hedge to rising interest rates”. What did you mean?

“Interest rates are generally expected to rise in 2018. Fintech provides a natural hedge in the sense that if interest rates rise and volatility returns to equity markets, our investments in stock exchanges and ETF market makers, for example, benefit from increased trading volumes and higher margins.

As banks and insurers profit from higher interest rates and, in certain countries, reduced regulatory oversight, they will have more room to invest in highly necessary core technology solutions. These investments will benefit the fintech enablers we invest in.”

Are you on the hunt for opportunities in newly listed or soon-to-be-listed companies?

“We only invest in publicly listed companies. We look at every IPO of a new fintech company. We do have a couple of basic requirements before we include companies in our investment universe. We consider market capitalization and liquidity after listing. Companies need to derive at least 25% of their profits or revenues from fintech or the digitization of the financial sector. We obviously look at the business model, the markets in which the company operates, long-term growth opportunities and management execution. We only invest in companies that are profitable today or that are on a clear path to profitability within the next six to eight quarters. Finally, the IPO’s pricing must be right. We have a GARP (growth at a reasonable price) approach to all our investments, also IPOs.

Although it’s still mostly venture capitalists and other private equity companies that currently invest in fintech companies, fintech is definitely investible from a listed perspective, with an average market capitalization of more than USD 10 billion. One of the benefits of listed fintech is its higher liquidity, as venture capital assets tends to be locked up for seven years or longer. Moreover, listed fintech is less risky. Many start-ups don’t make it and when they do come to the stock exchange, their viability is reasonably proven. The lower risk doesn’t have to be at the expense of return. Some listed stocks have increased multiple times in value. We do expect many fintech IPOs in the coming years, especially in software and Asia. “

1Source: Robeco. Figures in EUR, net of fees, F- and D-share respectively, based on transaction prices. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future. *MSCI All Country World. Inception: 17 November 2017.

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