By Hamlin Lovell, NordicInvestor
Jupiter’s Financial Innovation strategy has four sub-strategy buckets: yield; special situations; growth and structural growth. The structural growth sleeve is of particular interest in June 2020, since many companies, such as e-commerce vendors, driving or exploiting secular growth trends have continued growing revenues – even as the economy shrinks due to Covid-19 and lockdowns. Indeed, Covid-19 has in fact accelerated many multi-year trends, including the shift to cashless payments and cybersecurity solutions for remote working.
“Technology and digital transformation is at an early stage. It changes how we live and work, especially in financial services, where it brings a new era of disruption in payments, analytics, data and mobile banking. We identify both the beneficiaries of this change and the enablers providing solutions”, says Fund Management Director, Global Financials, Guy de Blonay. Therefore, the strategy can invest in both a broad spectrum of traditional financial services companies, and in selected technology and Fintech companies.
Intelligence comes from multiple sources: “we talk to technology companies and IT departments; banks and brokers and some independent research providers, and can subscribe for IPOs”, says de Blonay. “We want to understand what is at the top of their agenda”.
E-Commerce and Payments
In payments, the two main trends are shifting from instore retail to ecommerce, and from cash to cards. “Ecommerce should have at least a few years of growth left: the share in China is 20% and rising, against 15% in the US and UK, and below 10% in continental Europe and Japan”, says de Blonay.
“In payments, we own global players such as Adyen and PayPal, and also Worldline, which is listed in France, and Nexi, which is listed in Italy. These regional players are interesting because France and Italy have relatively low penetration of electronic payments. They can also benefit from a consolidation in Europe’s fragmented market”. Worldline has recently announced its intention to buy Ingenico to become the clear leader in the payment market in Continental Europe.
The growth stories differ between geographies: “in China, mobile payments have started to displace cards but we do not expect this to be repeated in Europe since the card networks have a dominant position and are trusted by merchants and customers. We own Visa and Mastercard”.
In any case, the best firms need to carry on raising their game to stay relevant. “As payment processing becomes commoditized, merchants expect their payment partners to add value through additional services, such analytics of industry sales trends or invoicing, that can help them attract more clients. We own Square. Omnicommerce also blurs the lines between online and offline retail, which creates a need for a single data pool to collect information and process payments. This unlocks new opportunities for firms such as Adyen, which is rolling out omnipresent payment solutions, forward analytics and other add on services to diversify its revenue sources.”
The payments space carries risks as well as opportunities. In response to Covid 19, de Blonay has reduced holdings in payments companies that have exposure to the travel industry, which can include liability for airline bankruptcies in some cases.
The cloud is another big trend seeing multi-year, double digit annual revenue growth, driven by cost cutting, faster upgrades, and working from home. De Blonay judges that cloud could finally be close to an inflection point leading to mass adoption. “Cloud started with Salesforce in 1999. For any new technology the first adopters are early movers as the majority of organisations are reluctant to incur the cost and take the risk of changing legacy IT systems. Gradually, it becomes more accepted by the peer group, and the value proposition becomes more clear. Cloud is now being used well beyond Salesforce’s early customer relationship management software or human resources software. We own Amazon, which owns AWS, and Microsoft, which owns Azure”.
Big data is another powerful force that de Blonay analyses from multiple angles. Data makes up a growing proportion of revenues for stock exchanges, driven by demand including three buy side trends of index-tracking, quant investing and ESG investing. Beyond bourses, other firms that can profit from the appetite for data include credit bureaus, such as Experian, and traditional data providers, such as IHS Markit. These two firms and several exchanges, including London Stock Exchange, Intercontinental Exchange, and Deutsche Boerse, are in the portfolio.
Covid 19 and Millennials
“Big Data apart, Covid 19 has acted as a catalyst for acceleration of these trends. The direction of travel was already well established, but the speed has changed. Additionally, Millennials and Generation Z are accelerating all of these trends. These age groups are much more tech savvy than baby boomers – or my own generation X. At some point, millennials will also enter the C suite and run companies”, says de Blonay.
These next generation, innovative technology companies are mainly US listed and mostly categorized as “growth” rather than “value” in terms of style factors. In common with other US and growth stocks, they have seen some valuation multiple expansion in recent years, and some of them trade on high multiples of profits – while others are not yet profitable. De Blonay owns very few unprofitable firms and will usually only buy such stocks if they are anticipated to be a year away from profitability. He acknowledges that, “valuing fast growing companies is always tricky. We frame valuations on a long term basis, considering normalised multiples five years from now. Investors often under-estimate how long innovative firms can sustain elevated growth. It is most important to get confidence on the addressable market, long term prospects, macro conditions and capital markets access”.
Adyen, which has roughly doubled this year to early June and nearly tripled since its IPO in June 2018, probably has the highest valuation of any stock listed on the Amsterdam stock exchange: a forward PE of over 100 based on consensus estimates. “But Adyen has a track record of beating expectations. Rather than focusing on 2021, the key question for us is whether it can grow into its valuation over the next five years. It has the leading technology in Ecommerce but less than 5% market share, and has just expanded into instore payments, which are a much larger market”, says de Blonay. “Even so, there is no way to argue it is cheap. We have been taking some profits on the position, but do not want to exit completely”.
Arguably, some structural growth companies have seen their valuations increase in 2020 due to a scarcity of earnings growth elsewhere in the equity market. But de Blonay is of the opinion that, “the most important short term driver for valuation is low interest rates and abundant liquidity. We understand the environment and flows of liquidity”.
Leverage and shorting
Given this constructive outlook, de Blonay is using a small amount of leverage to increase the volatility and beta of the portfolio to match that of its benchmark, MSCI AW Financials. (The April 2020 factsheet shows cash of minus 13%, which is actually leverage obtained through contracts for difference). The strategy can employ up to 50% leverage.
Conversely, when de Blonay is feeling more cautious, he can also hold up to 10% cash – though he is more likely to shift the portfolio into defensive “bond proxies” such as certain REITS.
Back in the great financial crisis of 2008, de Blonay also had some short positions, and some corporate bonds. He has had neither for the past 10 years because the interest rate environment was a reason to be bullish not bearish of equities. And he is not inclined to short challenged companies at present, because they are on low valuations. Instead, he simply avoids sectors facing headwinds, such as Scandinavian banks, which face pressure on net interest margins and uncertainty around dividends.
Indeed, de Blonay runs a concentrated, high conviction book of 40-50 names and need not heed benchmark weightings. The Financial Innovation strategy has returned 81.5% from inception in November 2006 to May 2020, against just 10.6% for its benchmark (EUR). The strategy was renamed Financial Innovation in December 2018, having previously been called Global Financials. The strategy has approximately 80% position overlap with the Financial Opportunities strategy (available in the UK only) that has a track record dating back to 1997 (including de Blonay’s prior roles at New Star and Henderson).
Many innovative financial companies also score well on ESG measures. “We want to own companies with best in class, sustainable business models and financial models. ESG analysis of companies includes their governance, transparency of communication and compensation policy. At the social level, human capital is critical to technology companies so they need to treat staff well to attract scarce talent”, says de Blonay. From an “impact investing” perspective, some technology companies help to further social goals, such as transparency, security, and efficiency. “For instance, Italian electronic payments provider, Nexi, has a role to play in the fight against corruption and the black economy”, he adds.