investment viewpoints

Quality investing in FinTech

Quality Investing in FinTech
Christian Vondenbusch - Portfolio Manager

Christian Vondenbusch

Portfolio Manager
Jeroen van Oerle - Portfolio Manager

Jeroen van Oerle

Portfolio Manager

There are many different investment approaches within FinTech, and it is our strong belief that quality investing is the best way to be successful in the long run.


Need to know

  • Based on the historic outperformance of quality investing, and given current market conditions, we believe it may be time for a shift back into quality
  • LOIM’s excess economic return approach offers a superior solution to a basic quality investing methodology
  • A quality strategy involves a much more subjective judgement and a combination of hard and soft fundamental elements
  • We feel it is important to focus on cash profit and cash return on investments instead of reported net income to avoid all kind of accounting distortions


Taking the long view

In the short term, a value, growth, or hyper-growth approach can work. However, consistent risk-adjusted outperformance in the long run is much harder to realise using such approaches, in our view.

Since 2017, we have noticed changes in investment approaches occur on an annual and even monthly basis. The most pronounced example is the popularity of the hyper-growth strategy in 2020 as everybody moved up the risk curve as much as possible, which was badly hit just one year later as interest rate expectations started to move higher, driven by higher inflation.


Quality proves superior

Quality, on the other hand, was somewhat out of favour in the 2020 risk-on environment, but has been clearly superior over the last three years. Contrary to belief, within the FinTech space we have identified an abundance of quality companies. Within our custom FinTech universe, 60% of the companies have achieved double digit Cash Flow Return on Investment (CFROI) over the last three years and 30% of the companies even managed to achieve a 20% plus CFROI over that same period.1

When taken in combination with the structural growth trends that are being driven by the digitalisation of the Financials sector, we see the potential for the magic of compounding: growing cashflows and economic profits over time.

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[1] Past performance is not a guarantee of future results.

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