As the boats of the Volvo Ocean Race reach the coast of the ‘new world’, the global financial sector is coming to grips with a brave new world of its own. Long-term trends are changing the core of the financial industry and investors can benefit. Patrick Lemmens, fund manager of Robeco New World Financial Equities, explains how he does it.
An investor first has to identify the most important structural, long-term trends in the myriad of changes that are going on. Lemmens has identified three main trends for his portfolio, which he calls Aging, Digital and Emerging Finance. These trends can cut across traditional (sub-) sectors.
As large parts of the world are faced with aging populations, demand for life cycle financial planning grows. As some pension schemes such as ‘final salary’ plans become unaffordable, it is increasingly important that people build enough savings to retire comfortably, and are able to pay for care and housing. “Companies that offer solutions to meet people’s pension/care/housing needs are interesting for us,” says Lemmens.
Like pretty much everything else, the financial sector is digitizing as well, which is transforming the competitive environment. First of all, global payments are changing: consumers are increasingly moving from paying with cash to paying with cards or electronically. Second, mobile payments are growing very rapidly. As a result, more and more financials are outsourcing their IT including even the front office operations. “As we do not confine ourselves to the traditional financial sector, we can also seize opportunities in the IT sector,” Lemmens says.
The third and last trend focuses on the growth of the global middle class. It is growing the fastest in emerging markets, though financial penetration is still very low. In developed markets Lemmens looks for financials that can grow by providing often basic financial services in an innovative way, or with limited competition.
“These three trends consist of many sub-trends,” Lemmens explains. “We want to have enough trend exposure to profit from growth if it materializes, but we also want to have some downside protection by investing in multiple, independent trends. An example of a sub-trend is the search for absolute returns. Here we invest in wealth managers with exposure to alternative assets, such as KKR, Blackstone, Carlyle and Oaktree. Increasing demand for ‘smart beta’ solutions, which are based on indices that take advantage of systematic market inefficiencies, and Exchange-Traded Funds (ETFs) is another sub trend, which is illustrated by our investment in WisdomTree.”
‘Even if there were full disclosure, it would be impossible to fully grasp the balance sheet of most financials’
Broad diversification is crucial in financials. “There are factors unique to this sector such as the unpredictability and influence of regulators, as well as the risk and impact of legal issues,” says Lemmens. “Also, it is impossible to fully grasp and predict the balance sheet and cash flows developments of most financials in which we invest. There is no full disclosure and even if there were, it would be impossible to do a due diligence on an entire balance sheet of, say, 1 trillion euros.”
Lemmens is most optimistic about emerging market banks and life insurers. “For banks as well as insurers regulation continues to play an important role but we do expect this to become less relevant in the next six months,” he says.
Also interesting are companies exposed to electronic or mobile payments and financial services IT. For the next 12 months, he expects a return in the low teens of percent. “And if long-term interest rates were to rise gradually, the upside for the sector would even increase,” Lemmens concludes.
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