The growing trend for cashless payments is generating real money for Robeco’s Global Fintech Equities fund.
The fund is celebrating its first birthday having comfortably outperformed its benchmark index, despite a significant market fallout seen in recent months. The fund has delivered a return of 14.76% gross of fees to the end of November 2018, compared to 4.28% for its benchmark, the MSCI All Country World Index (net return). This translates into an outperformance of 10.49%, making it one of the best-performing funds of the year.1
Its success has mainly accrued from careful stock selection by portfolio managers Patrick Lemmens and Jeroen van Oerle, backed by the wider Robeco trends and thematic investing team. Global Fintech Equities targets the investment universe of ‘financial technology’ that straddles digital systems and electronic payments.
It focuses on three types of companies: ‘winners’ that stand out from their peers; ‘enablers’ that help the financial industry develop and implement technology, and young ‘challengers’ which have the potential to become tomorrow’s winners. The mix has changed over the inaugural year (less challengers, more winners), but the core fintech growth story remains intact, despite market wobbles that have often made investing volatile.
“The theme has become more alive, and more financial institutions are talking about it,” says Van Oerle. “That has led to even more inflows this year from investors into the fintech theme than ever before. The fintech universe is expanding and the performance has been good, and growth in the assets under management has also been good.” From a standing start, the fund now manages EUR 672 million in total client assets.
“Traditionally, a big part of the fintech universe has been payments, and there has been increasing interest in that space,” says Lemmens. “We had a quite sizeable 25% position in payments at the beginning of this year, but our investment process leads us to reduce it when valuations go up and become less attractive. So we gradually reduced the weight to 15%, which helped when we had this bounce of volatility in September, October and November.”
“There is still growth for moving from cash to plastic and electronic payments in (supposedly) developed markets, but growth in Asia is better with better overall spending growth. In traditional markets like the UK and US, banks are seriously behind the curve in terms of IT, and they need to spend a lot more money on it.”
“It can be difficult for them to make the change because their systems are so old. Most large tech companies replace their core systems every seven years, whereas there are banks with systems that are 40 years old. There is clearly a need to change, but of course it is also costly.”
The biggest problem the fund has faced is the kind of global stock market wobble that has been seen in recent months. “We had said at the start that if tech comes down, we will probably also come down with it,” says Van Oerle. “Here you can see the added value of active management. Passive products have total exposure to a sell-down, whereas we can ask whether the dynamics are intact, and whether we should shift our positions, reduce our exposure to payments, increase exposure to cybersecurity, software, or whatever. So this sets us apart from passive products and their static portfolios.”
“We’ll always look at the fundamentals: has the story changed, is the company still a winner, and if that’s the case, we will keep with it, and actually even increase positions,” adds Lemmens. “People hold off a bit during volatile times, but as time goes on, it creates some interesting entry points for what we believe is a very solid long-term growth story still.”
“So if anything, the sell-down is a buying opportunity, since you get the same growth at a lower price. We see that fundamentals are just as strong as they were before, and we have no reason to believe that the trends or the core beliefs that we set out at the beginning of the year are not working. We don’t see that; everything is still intact.”
One way of avoiding the worst of wobbles is by having a well-crafted, balanced and diversified portfolio. “Investors sometimes ask us if there are enough companies out there to invest in, and we are able to show them that with the balance that we have between winners, challengers and enablers, we can build a balanced portfolio of about 60 to 70 holdings, where each one accounts for 1-3% of the portfolio,” says Van Oerle.
“We own payment companies all over the world, but we wouldn’t use the 17% weighting to put 8.5% into each of two very strong payment companies, because if one of them gets hacked, you have a tremendous problem in your portfolio. We would rather have ten different investments, which can all profit from the move to cashless payments, and that’s why we believe strongly in having a diversified, balanced portfolio.”
One idea that both portfolio managers are keen to debunk is that fintech companies are all small players that have yet to make money, with the romantic image of being start-ups run from someone’s attic. “We are in this game after the companies are listed, which means they are clear in terms of their earnings,” says Lemmens.
“We only invest in companies that are profitable today, or have a clear path to become profitable in the next 12 months. The challenger part of the portfolio does have somewhat younger and more volatile companies that invest more of their revenues, but it’s usually 15% to 25% of the portfolio, with a current weight of 17%.”
One trend in the tech sector this year that has seen share prices going strongly up rather than down has been the mergers and acquisitions activity. “We’ve seen quite a bit of M&A – mostly payment companies buying other payments companies in the globalized consolidation game that’s been going on,” says Van Oerle. “We also weren’t surprised to see tech companies buying other tech companies to get more scale and capabilities.”
“One thing that has surprised us though is private equity has become involved this year, and these guys only come in when they think they can double their money, says Lemmens. So they’ve taken out companies that were in our portfolio at 30%+ premium, which we were happy to take; if we can get a two-year return in one day, then we will take that! In all, there have been six take-outs and two acquirers in the portfolio this year.”
So, after a successful first year, what does 2019 hold? “If anything, we are more enthusiastic rather than less,” says van Oerle. “We are more convinced about the trends that we are looking at, and in terms of valuations, we also very optimistic and positive about the future potential. With the sell-off, we’ve had a bigger markdown in share prices than there was in growth this year, so now you can get cheaper access than when the fund started.”
“And of course, the core message is that this is a long-term trend,” adds Lemmens. “It’s not a hype that will go away next year; a hype is something that has no substance, but when you see the underlying earnings and growth of fintech, when you see that these are real companies, it’s not a hype. It is a long-term theme, but with a lot of volatility along the way. So it may be that next year will be a tougher year for tech in general, but it doesn’t mean that the fintech trend is dead, because the key beliefs are still intact.”
1The performance figures presented above correspond to the Robeco Global Fintech Equities fund for the EUR D share class. The value of your investments may fluctuate. Past results are no guarantee of future performance. In reality, management fees and other costs are also charged. These have a negative effect on the returns shown. All data to 30 November 2018.