white papers
FinTech positioning for a re-opening in 2021
The pandemic has accelerated many of the secular growth trends within FinTech and has helped to increase the digitalisation of the broader economy. This environment calls for selective stock picking and a disciplined valuation approach.
In recent whitepapers, we have focused on these accelerating trends within FinTech. In the first whitepaper, “Tokenisation: Revolution or Evolution?” we explained how the asset management industry would be impacted by asset tokenisation, which we consider to lead to the democratisation of investments. This creates winners and losers and despite it being too early to clearly point out who the winners will be, it is possible to invest in those that enable this trend to unfold in the coming years.
2020 has been the year in which many of the companies which either have a strong digital offering or the ones that enable the digitalisation of the financial sector and broader economy have performed very well
In “China leading the move to a digital currency,” we explain how the world is rapidly moving towards a fully cashless society, urged on by governments and health organisations to avoid the use of paper money during the crisis. This structural shift has been further boosted by China leading the way with the introduction of a Central Bank Digital Currency (CBDC) with many central banks following their example as a response to the rapid decline in cash and as an answer to the rise of private market initiatives like Facebook’s1 Diem and the tremendous popularity of crypto currencies.
In our last whitepaper, “Digitalisation in the financial sector” we elaborated on how digitalisation has transformed the thinking of financial service companies from something which is nice to have, into a must-have. We believe that the long-term strategic rationale for digital is shifting: 2020 is a year of cost cutting, 2021 is a year of re-aligning and prioritising IT projects, followed by many years of transformative digitalisation.
As a result, 2020 has been the year in which many of the companies which either have a strong digital offering or the ones that enable the digitalisation of the financial sector and broader economy have performed very well. Consequently, valuations for the digital winners, especially the hyper revenue growth business models have become very high.
Within our investment process we select reasonably priced profitable quality compounders with a high purity factor that benefit from long-term FinTech trends. Given the strong valuation discount to the hyper-growth companies, we expect to see a rotation into these more attractively-valued compounders. Furthermore, towards the end of last year we have added cyclical upside to the portfolio within the opportunity set of our proprietary FinTech universe. This in order to benefit from a sharp vaccine-led economic bounce back in 2021. An (even) more expansionary fiscal policy by the new US administration could trigger even more rotation.
The most interesting cyclical areas within our universe can be found within payments, more credit exposed personal finance FinTechs, online brokers and payrolling companies. We avoid BigTech as they do not meet our purity hurdles and we stay away from unprofitable hyper-growth business models.
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