Beautiful new financial world.
FinTech. Many industries have already been turned upside down by digitisation. Patrick Lemmens and Jeroen van Oerle are convinced that it is now the turn of the financial industry to Robeco. They identify winners and losers.
The future has long since arrived in Bangkok's kitchens. More and more people are paying with their smartphone instead of cash. According to estimates by asset manager Robeco, the number of cashless transactions with credit cards, smartphones or online is growing worldwide by eleven percent per year. Cash, conclude Patrick Lemmens and Jeroen van Oerle, portfolio manager of Robeco, is becoming more and more an exception.
"However, the massive growth of mobile payment systems is only one facet of the digitization of the financial industry. The FinTech revolution is one of the greatest megatrends of our time," explain Lemmens and van Oerle, "a long-lasting disruptive change that turns the status quo upside down and whose effects will be felt for years.
Today, for the first time, this already gives around two billion people the opportunity to open their own bank accounts and take their financial affairs into their own hands. New options, such as mobile transfers and securities transactions or chatting with the bank employee at any time, are increasingly being used by customers. And in the future, artificial intelligence is likely to create entirely new opportunities in wealth management and business analysis. Big Data applications ensure that asset management breaks new ground or that many insurance business processes are automated in the future. And the distributed ledger technology behind the blockchain is likely to speed up and reduce the cost of financial transactions.
The emerging markets in particular offer enormous potential. "In Asia, for example, the financial industry has already established a fully integrated mobile payment system, a large ecosystem in which everyone can participate," explains van Oerle. "And then there is the large potential customer base, which opens up huge growth potential for the financial industry thanks to new technologies."
"The use of new technologies not only opens up completely new business opportunities, it also makes many processes more efficient and will thus improve profitability in the 'old' financial industry," the two experts consider. Therefore, an increasing tendency towards cooperation between young FinTechs and the established credit institutions is to be expected. "While the former gain a broader customer base, traditional financial services providers benefit from access to innovative technologies," explains Lemmens.
For Robeco fund managers, this opens up a wide range of interesting investment opportunities. "Today, the FinTech universe already includes more than 200 companies with an average market value of twelve billion dollars. In addition, there will be many more exciting IPOs from start-ups in the future," explains Lemmens.
In order to identify the favourites of dynamic change for their Robeco Global FinTech Equities fund, launched at the end of 2017, the fund managers differentiate between three areas. Established winners" include companies such as VISA. "They have built up a strong market position over the years, are stable and grow at low double-digit rates," explains van Oerle.
In addition, there are the so-called "facilitators" - companies such as SS&C or Temenos - whose growth paths are well predictable and whose banks and financial service providers help to develop and implement the new technologies. And then there are the "challengers" - young, fast-growing companies like Square, Green Dot or Wirecard, who have the potential to become tomorrow's winners. "Although the growth rates in turnover and profits are very high there, the valuations of the shares are also quite ambitious", explains Lemmens and concludes: "The art of composing a successful FinTech portfolio is now to combine these areas in a first step in such a way that opportunity and risk are in a balanced relationship".
The second step is the selection of the most promising companies. "We pay great attention to fundamental data such as valuation, momentum or earnings revisions and responsible management," says van Oerle. In addition to the ability to assess financial ratios, a great deal of technical know-how is also required. "We take a close look at the companies' innovative strength and technology in order to assess the growth drivers and thus the profit margins to be expected in the future," explains Lemmens: "If these are underestimated by the market, then we invest.
However, an investment in this area is not risk-free. Because there are three important factors of uncertainty - the regulatory system, fraud with corresponding image damage or cyber attacks in which sensitive customer data is stolen. "The catch is that such events are virtually unpredictable. They will always cause irritation and stronger price fluctuations, but will not change the long-term trend," analyses van Oerle.
In their portfolio, they meet this challenge with a broad diversification (below), a long-term approach and clear discipline in buying and selling decisions. "We invest in the best values of the three areas. And they will gradually increase their positions if our fundamental analyses are confirmed. But we also sell just as consistently when the price potential has been exhausted or when our assessment has changed."
"Today we have the unique opportunity to benefit from the radical renewal of the entire financial sector. Over the next five years, we will see innovations that outshine all the upheavals we have experienced so far," conclude Patrick Lemmens and Jeroen van Oerle: "This does not mean that FinTech's share prices will rise in line. But when investors look back at today in five years' time, they should be positively surprised." ®
// How to invest in FinTech.
Robeco Global FinTech Equities (ISIN: LU1700711077) invests in companies that generate at least 25 percent of their revenue or profit from FinTech. "Overall," explains fund manager Patrick Lemmens, "we will generally have 40 to 70 stocks in our portfolio, with a maximum weighting of five percent depending on our assessment, which also takes into account our quantitative analysis. If a stock rises sharply in price and thus gains too much weight, its position is regularly adjusted. Currently, almost 70 percent of the portfolio is made up of American stocks, 21 percent of European stocks and ten percent of Asian stocks. "However, we assume that there will be many opportunities in Asia in particular in the coming years, which is why this share is likely to rise," explains Jeroen van Oerle, who manages the fund together with Patrick Lemmens. The fund was launched in December 2017 and has since grown by 21.5 percent, while its benchmark index, the MSCI World, rose to 8.3 percent (as of 30 September 2018).
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