investment viewpoints
The future is FinTech
FinTech has already revolutionised financial services and looks set to shape the future trajectory of the industry. This is currently a USD 150-plus billion industry that is estimated to grow by 20% in the next 5 years alone1.
Financial technology, or FinTech, both disrupts existing financial services and sustains innovation within them. Within certain areas, FinTech is clearly disrupting traditional financial service providers, while in other areas, FinTech solutions equip traditional financial service providers with the tools to retaliate and defend their market position.
For instance, FinTech has already revolutionised payments, mobile banking and how consumers interact with services and providers. We see strong potential in other new, disruptive services and products such as blockchain, artificial intelligence (AI) and digital currencies.
FinTech will eventually evolve into a new financial service sector comprised of very different players.
We believe FinTech will eventually evolve into a new financial service sector comprised of very different players. The winners and losers are being determined as we speak, and are mostly characterised by their ability to transform legacy business and offer relevant services at competitive prices.
Don’t believe the hype
To differentiate between the likely winners and losers, we adopt a trends-based approach in our investment process. Our starting point is to define the key trends we expect to drive growth and returns in the coming years. We analyse the longevity potential of these trends, and differentiate trends from hypes.
A hype is a momentary phenomenon that, if invested in at the right time, could bring a short-term, but unmaintainable return. Timing and exploiting hypes is difficult and highly unpredictable. Investing on the basis of enduring trends, in contrast, leads to opportunities for long-term excess returns by exploiting behavioral biases in the market.
Key trends can continually evolve, and we believe the endurance of the trend in the long-term is an important selection criteria.
What could the future look like?
Our FinTech strategy is based on five core beliefs. These provide our top-down starting point to find bottom-up companies that stand to benefit most.
- The world will move towards a fully cashless society
- Digital finance aids financial inclusion
- Digitalisation lowers barriers to entry, improves efficiency and enables new financial services
- The rise of technology ecosystems
- Cyber security as a basic necessity for all digital financial services
Not all trends lead to long-term return opportunities, and not all long-term return opportunities fit with a trends portfolio. It takes experience and expertise to know the difference.
We use sustainability criteria to filter the selection of companies as a key focus of our investment process.
At LOIM, we see sustainability as a core conviction that further encourages portfolio resilience. Therefore, we use sustainability criteria to filter the selection of companies as a key focus of our investment process. In our view, sustainable companies benefit from an attractive combination of sustainable financials, sustainable business practices and sustainable business models.
Such companies are best positioned to capture the long-term growth trend offered by the digitalisation of financial services, in our opinion.
Bespoke, dual expertise
A comprehensive understanding of FinTech dynamics requires in-depth knowledge of both financial services as well as technology. We believe that to prioritise just one, as is often the case in this industry, cultivates weakness in the investment process.
On the financial services side, expertise is pivotal to identifying how regulations, capital requirements and other factors drive the sector. On the technology side, specialisation is necessary to fully evaluate new technologies and their potential to disrupt. Our teams combine decades of experience in both sectors.
We believe our dedicated FinTech strategy and expertise are uniquely adapted to this sector, and offer investors the potential for strong growth.
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Investing in the digitalisation of financial services provides noteworthy return potential, in our opinion. A large number of high quality companies exist in the FinTech universe and, given the right expertise in both financials and technology, it is possible to construct a diversified portfolio that reaps potential benefits.
sources.
1 Source: LOIM estimate based on average of industry sources. Estimated growth of 20% in compound annual growth rate (CAGR) to 2025.
