Fintech: the power of collaboration

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  • 31 mins 34 secs
Vincent Vinatier, Fintech Portfolio Manager, AXA IM Framlington Equities, joins Robert Bailey to discuss thematic investing and what those themes are, his Fintech strategy, major bank investments, structural growth prospects and the structure of the portfolio.

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ROB BAILEY: Hello, and welcome to today’s AXA Investment Managers webcast. I’m Rob Bailey. I’m Head of UK Wholesale Distribution, and today I’m joined by Vincent Vinatier. Vincent is the Fund Manager of the AXA Framlington Fintech Fund. Morning Vincent.

VINCENT VINATIER: Morning Rob.

ROB BAILEY: So we’re going to talk to you today about what is now the AXA Framlington Fintech Fund, historically having been the AXA Framlington Financials Fund. We converted this fund on the 20th of November this year, with the view to having the fund invested in a very exciting and interesting area. And we’re going to talk about that during the course of today’s webcast. So Vincent, you’ve been with AXA Framlington since 2012, tell us a little bit about your background, and the team that you work with.

VINCENT VINATIER: I started in the City in 1997, so that’s about 20-something years ago unfortunately. And I’ve been with AXA for the last six years, so the importance is to get close to quite a number of people, which I now work with daily. Some people you might already know. We have Jeremy Gleeson for example, our tech guy, who I interact a lot with. We also have lots of regional specialists looking at Japan, like Chisako, some of you may know her already, or Simon in Asia and the likes. And I work very closely also with two persons which are called Pauline and Alex, which are really providing me some day-to-day backup, you know, and liaising with the team. So quite a close cooperation for a large team and what it means is I’ve got access to quite a lot of expertise basically, to help me put together good performance.

ROB BAILEY: You also manage another Fintech fund. We’re in the process of looking at an offshore version, but there’s also a version for a client in Japan. What’s the total amount of assets you’re managing at the moment?

VINCENT VINATIER: Well in total under this strategy we’ve got about $900m, which we’ve been running for some time. So we really know what we’re doing there basically. It’s not a new area for us. And I would say that even the global financial firm has had a very strong tech bias for some time, because over the last few years we realised that it’s becoming a key part of building a competitive advantage, investing in digital. And so the fund was increasingly digital in nature, up to the point where for a number of reasons but including the fact that we could build a fund that invested throughout the value chain in Fintech, it started to make sense to actually make the switch and invest properly in Fintech.

ROB BAILEY: So this is very much a natural evolution of the existing fund that was in place.

VINCENT VINATIER: Absolutely, even before the switch I would say that 60% of the holdings were already in the fund.

ROB BAILEY: All right, well let’s talk a little talk a little bit more about the environment you work within, because we’ve spent a lot of time and effort over the last couple of years trying to explain our approach to thematic investing, and the themes that we invest in, and we’ve spent a lot of time talking about our global thematics fund. The slide here talks about the five themes as we see it: ageing and lifestyle, connected consumer, automation, clean tech and transitioning societies. So within this overall circle, this umbrella, where does Fintech sit?

VINCENT VINATIER: We tend to show it as part of the connected consumer, because that’s where it’s got the largest natural fit. But actually Fintech is about financials. As you know financials, it’s really the whole infrastructure of the economy. It’s where the life blood of the economy circulates. So therefore it touches almost every one of these categories. For example you could say it’s a play on demography, quite easily it’s a play on infrastructure for some developing markets. So it’s connected consumer but with a wide ranging application.

ROB BAILEY: And so let’s talk a little bit about actually what you mean by Fintech, because that in itself is a term which is not so clearly defined. When you talk about Fintech, what do you mean?

VINCENT VINATIER: What we mean is we talk about these companies that are able to identify and leverage technological innovation to disrupt or improve the financial market basically. And by financial market I mean the market for financial services. So it can be things like digital banking, it can be things like [unclear 0:04:35] in some areas, or artificial intelligence, machine learning, big data, all these concepts. It’s really about trying to identify those that can change financial services.

ROB BAILEY: So it’s very much a financial services background, and by financial services we’re talking above and beyond simply payments and transfers. We’ll come on and talk about some of the examples of what we actually mean by Fintech companies later on, but I think that’s pretty clear. So if I was to say to you at this moment, we’re in a world where there’s a lot of macro issues to focus on. We’ve got obviously Brexit in the UK and Europe. We’ve got Trump and China talking about trade wars. Why would now be a good time to invest in Fintech companies?

VINCENT VINATIER: Well the key reason is clearly because we think we’re at the point where the mass market take-off is happening. It wasn’t the case two years ago, and it’s only now starting. And I think you will see a very big change in the number of applications, and more importantly you will see a very big impact on the competitive, the relative competitiveness of some of these businesses. Some will be big winners, and some will be big losers, and it will become apparent in a way that wasn’t the case two years ago. And obviously the other reason why you should not worry maybe too much about these short-term macro and sentiment issues is because we’ve had many proofs of that and surveys. And one of the ones I like to mention is this PCG survey, which you have there on the screen, which shows that over the short term clearly total shareholder returns are driven by sentiment. It’s a big part, derating, rerating and short-term news flow, it can have a big impact on your returns.

But in the long run this kind of sentiment changes, they kind of average out, and what really matters is the growth in sales revenues and margins: are your growth in profits? If you can identify these growing companies you’ve got a winner as a shareholder. And really this is the philosophy that’s underpinning really all this fund, and also all the thematic range; it’s identify those companies that have excellent growth prospects over the next five to 10 years.

ROB BAILEY: So it’s identifying companies that have excellent growth prospects within sectors that we think are long-term trends that are sustainable I guess.

VINCENT VINATIER: Absolutely, although it can vary. What’s quite different with Fintech, Fintech is an enabler of competitiveness. So even though we are not working on the basis that financial services as a whole has, if you define it as a profit pool we’ll see massive growth over the next 10 years. What I’m certain of saying is a massive redistribution of this profit pool. So in that sense some companies will grow very quickly, and some will not. And some of the tech companies obviously have very great growth prospects by themselves.

ROB BAILEY: So let’s look at this question of longevity here, and the disruption I guess to the broader ecosystem. Explain to us what this graph’s demonstrating here. This is private equity investment into Fintech companies, but what do you actually mean by that?

VINCENT VINATIER: Well what’s quite interesting here is it’s really the financing of early stage ventures. So new technologies, new ideas that will eventually disrupt the whole financial services industry. And what’s quite interesting is you see a constant growth. You would think that at some point there is no more innovation to come, everything has been found. It’s not the case. We still have lots of people getting great ideas, and the money coming in is really accelerating. So what it means in terms of in practical terms for us, is that you will see these innovations coming to market over the next one, three, four years, and therefore disruption will accelerate from here, just because of all these new technologies coming through.

ROB BAILEY: And this private equity investment into Fintech companies here, which as you can quite clearly see from this graph looks, particularly Q2 2018 looks like there’s been a significant uptick in interest in investment in this area. What’s been the driver of that, is that the innovation or is that just the fact that we’ve some monetisation of these things?

VINCENT VINATIER: I think there is monetisation clearly. It’s becoming more obvious what we can do about this technology; whereas beforehand it was still a bit more of a fuzzy concept basically. But I have to say that Q2 was very specific, and the graph we have here overstates in some ways the number of deals, simply because a big chunk of that was an investment in Ant Financial, which is a Chinese Fintech company, which is a great leader there. But still the underlying trend remains very positive.

ROB BAILEY: Well we titled this presentation moving from competition to collaboration. On this graph here we’ve got a number of financial companies who will be very familiar to anybody watching the webcast. Explain to us how these companies are benefiting from these opportunities, or are taking part in these opportunities.

VINCENT VINATIER: I mean just giving you the background, I mean the reason, one of the key reasons we think now is the time to go into Fintech is really because we think there is a move, which is from what we call the competitive to the collaboration way of functioning basically. And what I mean by that is that all the easy niches that could be filled by new startups have actually been filled. So there is not much more growth opportunity for the small players coming in with an exciting new technology. And on the other hand what we are seeing is really the financial world itself, the large companies are now getting digital. They understand what it means, and they’re starting to invest properly and to really fight back I would say. So you see a lot more companies, like for example we’ve got City, we’ve got BBVA with BBVA Ventures, we’ve got the likes of JP Morgan.

City has $9bn VC fund investing into Fintech, and what that means is City can now monitor what’s happening in the space, identify the most interesting ideas, and test them in the network very quickly, and if they work roll them out at scale quite quickly. And the other big thing you have to be aware of is there are quite a lot of constraints when you scale up. So if you’re a small startup in Fintech, you haven’t had issues with regulatory requirements like KYC, money laundering issues, these kind of things, or even like capital and solvency constraints. As these guys move out of their niches, they’re starting to be confronted with these issues, and for them they often realise that it makes a lot more sense to work with an established financial company that can give them this expertise in terms of regulation, this market access, and provide the financing basically and solvency.

ROB BAILEY: So it’s kind of a symbiotic relationship where both parties benefit from, one from the experience and the other from the innovation and it’s a win-win.

VINCENT VINATIER: Exactly, and all this investment by the financial companies mean they actually, they’re now about to speak Fintech, they can now speak digital; whereas two or three years ago it really wasn’t the case. I mean there was such, they were coming at it from such different angles that it didn’t really work. Now it’s possible, but it’s not possible for all of them, obviously, and we’ll come back to that.

ROB BAILEY: And there’s, on the top right here a section about Google teaming with banks on digital lending in India, so it’s not always the big banks and the small tech companies. It’s sometimes the big tech companies and smaller organisations as well I guess.

VINCENT VINATIER: Yes absolutely, but that’s why we’re quite comfortable that some of the financial companies have much better and stronger prospects, and what some people still think. And it’s also because the large tech companies are actually coming to the same realisation that they are not built to provide financial services. And this Google example exactly highlights what I mean by that. It was about two or three months ago Google decide to offer personal loans to their customer base in India. And clearly you would have thought that Google with 200 million users in India could have gone it alone. They’ve got the balance sheet very clearly, they’ve got the knowledge of the client because of all the data they can collect, and they collect a lot of data as you know.

ROB BAILEY: Yes.

VINCENT VINATIER: And the other thing is clearly they’ve got the market access, because they can talk to the client direct. So why didn’t they go for it? Well I think the first reason is it’s a very long-term trend of them being increasingly aware that politically speaking it’s very hard for tech companies to be seen as wanting to take over the world. And there is increasingly talk of splitting them up, re-regulating them, so it makes more sense to be partnering and be willing to share the cake basically. But the other reason, which is even more fundamental than that, is if you think about these tech companies they’ve got a global business model. So they develop and product and they sell it everywhere. Same product everywhere globally. But financial services don’t work like that. There is a very strong element of local constraints. It can be the regulation, your KYC processes are very different. Again ANL procedures very different. Solvency, how you report, what you can say to your clients, what you cannot say.

So that’s one big constraint. And the third constraint I would say is that it’s very specific to this case, but if you start extending credit you have to assume that at some point people don’t pay you back. And then do you want to be seen as the guy that goes and knocks on the door and say please give me your money back, otherwise you’ll be in trouble? If you’re Google and you do that, there is a reputational issue there. So it makes a lot more sense to work with a local partner that’s already up and running. But you will only work with this local partner if they really understand digital. So you can really speak to each other, and your teams can talk to each other.

ROB BAILEY: Yes, and there has been a lot of discussion hasn’t there, around the likes of the major tech companies and the collateral damage they open themselves up to. So I suppose this is a very good way of protecting their brand in local markets.

VINCENT VINATIER: Yes, it makes lots of sense for everyone.

ROB BAILEY: So let’s talk about the structural growth element. On the next slide we’ve got the adoption of e-commerce since 2002, the growth of which has been staggering. But I was, I don’t whether I was surprised or not, but 9% of global retails sales are transacted online. I thought the figure would be higher than that.

VINCENT VINATIER: Well it is, this is an average, and as every average it’s a bit confusing, and the US is probably a little bit ahead of that. But this 9% is a global average. If you look at China, which is really way ahead of everywhere else on this front, on digital, probably quite simply because they bypass the infrastructure building, so everyone went digital native straightaway. But China is at more than 25%. And we think that this is going to be where the rest of the world will go, but it’s a demographic thing. In Europe and in the US and most developed markets there was no need for it yet, because we’ve got a proper retail infrastructure and all the reasons. But we’re quite confident that over the next 15 years the world will move to 25% and China will probably move to 40-50%. And what that means is if you’re providing a payment service for example, the volume you will be able to handle, especially when developed market with the purchasing power comes through, the volumes will continue to grow at a very strong pace for many years.

ROB BAILEY: And the composition of Indian payment methods here, explain to us what we’re actually seeing here.

VINCENT VINATIER: Well it’s an interesting graph, because as you know India was mostly cash-based, the cash-based economy for quite some time. And we’ve had lots of efforts by the government to take cash out, and one of the effects of that has been to push digital payments through. And the level of digital payments, I mean the volume was about $200trn, sorry $200bn last year in 2017, and it’s expected to go to $1trn, more than $1trn in 2021. So again you can see massive growth coming through, and so all the providers of digital payment services in India have this enormous boulevard in front of them to do business.

ROB BAILEY: And obviously I will have I guess government incentives to do that on the basis that it helps raise tax revenues.

VINCENT VINATIER: Exactly, that’s one of the big issues. If you move out of a cash economy, you maximise your tax take.

ROB BAILEY: So let’s move on and have a look at the fourth key message you’ve identified here, which is the innovative leaders disrupting traditional models. Looking at some traditional models that have evolved over the last few years, talk us through a couple of these.

VINCENT VINATIER: Well we can talk about Fineco. And we’ve decided to talk about Fineco because everyone knows that Italy, which is the market Fineco is active in, Italian banks have been in a very difficult position for quite some time. And actually the average bank here in terms of share price and shareholder return is probably down 50% over the last three/four years, so not a great space to invest. And despite this we’ve had Fineco in some of our funds going from, I think we picked up the shares at €4.50, and they’re now trading at €10.50 over the same time span. So if you pick the right place that understands digital, you can make very good returns for your shareholders.

ROB BAILEY: Despite the fact that the banks generally in Italy have done really badly.

VINCENT VINATIER: Exactly, and it’s just because by harnessing this digital power, Fineco has been able to do two things. The first thing is offer much better client service than the rest. So whereas all the other ones have been busy rebuilding capital after the global financial crisis, and not being able to invest in digital, Fineco has. And so with the Fineco interface the clients can see all of their assets, can put some trade-offs for anything, very convenient. They can check it online at absolutely any time, and they’ve got the level of advice which is much more tailored to their needs, much faster. So that’s one aspect, very much higher satisfaction from the customer, and that’s shown in some of the awards that have been given. I mean it’s the world’s most recommended back by its clients, which is quite amazing for an Italian bank if you think about it. And that works, because you can see the growth in assets that’s been reflected there. It’s been a massive growth over that time.

The other thing where Fineco has been very good, and that’s the other thing about the secondary impact of Fintech is on the efficiency front. The banks and other financial companies are starting to use Fintech to become a lot more efficient, and we’re talking about things like getting rid of paper, going paperless processing, which gives you much more reactivity, much more ability to answer a client quickly and efficiently. And there is a strong cost reduction to it. And this is a virtual circle that you put in place, where you’re more efficient, you generate more profits, then you generate more capital. You can reinvest more into digital etc. etc.

ROB BAILEY: OK.

VINCENT VINATIER: And one of the, there are a number, a few numbers that you need to keep in mind with this. One of these for example is JP Morgan. JP Morgan is a bank that has an IT budget of $10½bn this year, big chunk of money.

ROB BAILEY: Yes.

VINCENT VINATIER: Half of that, so £5.3bn is going into Fintech and new initiatives. And what it means is that they’re building some kind of competitive advantage that’s going to be very hard to displace going forward. If you’re a smaller bank you’re not well capitalised, you have not invested. Clearly you will lost market share, then you will lose profit, and those that are well positioned for digital will just capture this profit, and will demonstrate strong growth.

ROB BAILEY: Let’s move on to this point, because I think that dovetails nicely into your final point, which is about selectivity. Because not everyone’s going to win in this competition are they?

VINCENT VINATIER: No, I mean you need to be very selective, both when you look at the new technologies, and when you look at the companies themselves. In terms of technologies there are a few companies, or a few technologies which right now we just don’t believe in. Things like for example cryptocurrencies. It’s not something we’ve got in the fund, we will never have. I mean for me it’s not an investable asset. An asset for me is something you define by either its usage, in that case I would say 95% is money laundering, so it’s hardly a legitimate usage. Second way you define an asset is if it generates cash flows. Forget about it. And then is there a hard asset at the end that you can liquidate? Again we don’t have any of these. So for me it’s just a bubble, and we don’t have any of this.

ROB BAILEY: And one of the questions we had was on cryptocurrencies, which is would central governments ever have allowed there to be a currency over which they had no control or very little influence? And I guess your answer there is no.

VINCENT VINATIER: No, absolutely not. I don’t think it will happen any time. And there are some other things where we’re very cautious in terms of putting some fund money, and one of this is Blockchain. You know, every company I meet has got a Blockchain by it. Why, probably because you need to look at this new technology, but it’s really, Blockchain is a solution that’s looking for a problem basically. And for me it’s not really the way you do it. You identify a problem, and you use technology to solve the problem, and make your life easier and better for you and for your clients. Blockchain is really a very neat solution, but right now I haven’t seen any exciting application that makes sense. There will be a few, but they will be marginal. So this idea that the world will be taken over by Blockchain doesn’t make sense to me.

ROB BAILEY: And on the positive side you’ve got in there digital security requirements, does digital security fit into this fund and this particular theme?

VINCENT VINATIER: Yes absolutely, we’ve got three companies that are active in the space. And they’re providing services throughout the security space, which might be from firewall to email and fishing identification and emergency response software or, you know, [unclear 0:23:12] spectrum. And the idea is very clearly financial transactions are a very sensitive area. So there are lots of attacks in this space of people trying to get data, trying to penetrate firewalls, get into financial institutions and the likes. And with the exponential increase in the number of connected points, it’s the famous internet of things. The number of potential entry points that you need to protect is rising exponentially, so therefore it’s an integral part of developing a proper digital financial world.

ROB BAILEY: Let’s move on and talk a little bit more about the fund. Within the fund you’ve identified here three subthemes that you focus on. Talk us through the three subthemes.

VINCENT VINATIER: Well the first theme we’ve identified as showing great growth potential is payments, and we still think that the payment industry has got an extremely attractive growth path ahead of it. And we’ve discussed about India, we’ve discussed about the rising online payment, and that’s underpinning it. Part of it is this kind of direct play on volume growth basically, and part of it is for, we’re investing into a lot of software companies providing the payment services. And it’s increasingly complex thing to provide, because the modern retailer needs to be able to accept a payment online for a good. And when you receive the good you want to be able to maybe walk into a store, give it back and get a cash refund. And what that means is, and sometimes you do it across several countries.

ROB BAILEY: Yes.

VINCENT VINATIER: So what that means is very complex requirements in terms of being able to provide a solution to these guys that links with their accounting system, links with their stock taking system and all this, and you’ve got few people that can do it properly on a global basis. And we invest in some of the companies providing this service. And we’re confident that they have again very strong growth prospects.

ROB BAILEY: Innovative leaders.

VINCENT VINATIER: Innovative leaders, and again I will remind you, we’re trying to play this theme throughout the value chain, which was not possible a couple of years ago but now is possible. So innovative leaders for us, it’s this space that is in contact with the final client. So it will be digital banks, it will be insurance companies that leverage machine learning, artificial intelligence, all of this. And in that space what we’re trying to do is identify companies like Fineco we’ve talked about. So in each geographical area we try to find the best player, the best in class digital player, the ones that have been able to use digital to build a very significant competitive advantage. And we try to really select these companies where Fintech makes a difference.

ROB BAILEY: And technology enablers.

VINCENT VINATIER: Technology enablers is the other side of the value chain. It’s really the companies providing the building blocks that you need to put forward this offer to your end customer. So it’s going to be the software that’s making all this run. It could be people building software about big data modules for example, or it could be security software we’ve talked about. It could be core banking systems that replace your old and clunky stuff, all these things.

ROB BAILEY: So looking at the Fintech fund itself, so say this has been running since the 20th of November. In terms of the portfolio shape, tell us about the number of stocks and so forth.

VINCENT VINATIER: We’ve got a target of between 40 and 60 stocks, but actually we probably will keep it towards the lower of this. I mean as of today the portfolio has got 43 stocks. We want to be fairly concentrated, and we’re really going for quality. So we’d rather have less stocks that we are really confident will do well over the long term. The typical investment position will be between 1% and 6% maximum. In practice we tend to be more at the 4-4½% level. And it really depends on the level of confidence and the risk reward profile we get for the stock. So big companies, very liquid stock with great prospects we can go 4%. For smaller software stock, which is by definition more volatile, maybe we’ll have 1%. And then you will shift according to the risk reward process how, or the profile, how it changes. So if a company goes up in price you will go 4%, then 3%, then 2%…

ROB BAILEY: But you’re actually talking about a universe here of about 400 stocks, so it’s one tenth of the investable universe that you’re looking at here.

VINCENT VINATIER: Absolutely.

ROB BAILEY: And active share, how important is that in your thinking?

VINCENT VINATIER: It’s really, we’re really running it by selecting the right stocks basically. So this is the result of the stock selection process. This is not an output we’re aiming for very clearly.

ROB BAILEY: So it’s an output rather than a target, absolutely. So looking at the portfolio structure, we spoke about the subtheme breakdown, it looks like we’re, you’re not quite a third, a third, a third, but there’s a good split between the three themes.

VINCENT VINATIER: Yes.

ROB BAILEY: The underlying sectors beneath that, again it’s very diversified. This comes back to your point you say about managing the risk.

VINCENT VINATIER: Yes absolutely, I mean we try to keep a balance between the emerging technologies, the established players, the financial strengths, the ability to innovate, and try to put all this in the portfolio that at any given time makes sense, and is a bit kind of an all-weather vehicle. One of the added benefits, which is quite interesting for this fund, is as you say the macro is volatile and uncertain, and we really think long term. But in the short term what’s quite nice is by having this mix of financials which are inherently positively exposed to rising rates, and technology stocks which tend to do well when rates are lower, you’re almost rates agnostic. Whether or not rates go up or down or stay where they are, it shouldn’t make much difference to this portfolio. And again that’s about portfolio construction, and how you put this together.

ROB BAILEY: We’re running out of time now Vincent, so just quickly, I just want to quickly have a look at the top 15 holdings within the portfolio that we’ve got here. Some of these names will be very familiar to people, PayPal, WorldPay, you know, Citigroup, they’re familiar names. Talk to us about one of the less well-known names we’ve got here, Verisk Analytics.

VINCENT VINATIER: It’s a software company, and they provide this kind of big date model where they will put together things like a map of the waterways, maps of the sewers and all the buildings in one area, including whether they’ve got basement, their elevation, whether they’ve got windows, the material of the house, all this data put together. They will link it with software, with weather forecast software looking at hurricanes and the amount of rain likely to fall. And they sell that to the US PNC companies. And the US PNC companies use that to sell you house insurance, and they will be able, by using this module they will be able to quote you a price instantly. And they can also use it for added value services, like sending you an SMS when a storm is coming, and telling you oh watch out because rain is coming, we know you’ve got a basement, so if you’ve got any valuables you’re likely to get flooded so please move it up. It’s the kind of company which provides a service, which when you’ve started to use it it’s very hard for the customer to get out of it. So you’ve got both strong growth and a very defensive profile, because the customer is not going to go away.

ROB BAILEY: All right, well thank you very much Vincent, that was very interesting, and good to hear about the new Fintech fund. Vincent Vinatier, the Fund Manager of the AXA Framlington Fintech Fund. So thank you for joining us today. I hope you found that webcast useful, and we look forward to speaking to you next time.

VINCENT VINATIER: Thank you.

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