Bruce Glazer presents the Wellington FinTech Fund amid a ‘golden age’ for innovation in the sector
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With over 20 years of experience of researching and investing in fintech, Bruce Glazer, lead portfolio manager of the Wellington FinTech Fund, explains how he is exploiting one of the most powerful and important themes from across the global economy. In this guide, he reveals how he is building a growth portfolio of high-conviction stocks that he believes offer the potential for double-digit growth rates in the coming years.
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WELLINGTON FINTECH FUND INVESTMENT RISKS
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As the sector reaches a tipping point in terms of innovation and breadth of opportunity, Glazer also details the secular growth characteristics and explains why he believes it is one of the best long-term investments available today.
Wellington Management Company LLP (WMC) is an independently owned investment adviser registered with the US Commodity Futures Trading Commission (CFTC) as a commodity trading advisor (CTA) and serves as a CTA to certain clients including commodity pools operated by registered commodity pool operators. WMC provides commodity trading advice to all other clients in reliance on exemptions from CTA registration. WMC, along with its affiliates (collectively, Wellington Management), provides investment management and investment advisory services to institutions around the world. This material has been prepared exclusively for use with eligible counterparties, professional investors, wholesale clients and non-retail investors for general information purposes only and does not take into account the investment objectives, financial situation or needs of any particular person. This material and its contents may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management. This document is intended for marketing purposes only. It is not an offer or a solicitation by anyone, to subscribe for shares of any Wellington Management Fund (the “Fund”). Nothing in this document should be interpreted as advice, nor is it a recommendation to buy or sell securities. Investment in the Fund may not be suitable for all investors. The Fund only accepts professional clients or investment through financial intermediaries. The views expressed are those of the author at the time of writing and are subject to change without notice. Fund shares are made available only in jurisdictions where such offer or solicitation is lawful. Please refer to the latest Key Investor Information Document (KIID) where available, the Fund offering documents, and the latest annual report (and semi-annual report) before investing. For each country where UCITS Funds are registered for sale, the prospectus and the KIID are available respectively in English and in the official language(s) (please visit www.wellington.com/KIIDs). For share classes registered in Switzerland, these can be obtained from the local Representative and Paying Agent — BNP Paribas Securities Services, Selnaustrasse 16, 8002 Zurich, Switzerland, together with the Prospectus in English, French, Swiss French, Wellington Management Funds (Ireland) plc is authorised and regulated as a UCITS scheme by the Central Bank of Ireland. In Europe (ex. Austria, Germany & Switzerland), Wellington Management International Limited (WMIL), a firm authorised and regulated by the Financial Conduct Authority in the UK. Not FDIC Insured — No Bank Guarantee — May Lose Value. ©2020 Wellington Management. All rights reserved. As of June 2020. WELLINGTON MANAGEMENT FUNDS ® is a registered service mark of Wellington Group Holdings LLP
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is transforming the way businesses operate
Name xxxxxx xxxx xxxxx xxxxxxx
The sector is a much more dynamic industry today
Stan Verhoeven From 2007 to 2011, Stan worked at Kempen & Co as a quantitative analyst and (exotic) derivatives trader. He joined RBS in London in 2011 and moved to PGGM in 2012, where he was responsible for research into alternative risk premia. In 2015, he joined the Factor Investing team at NN Investment Partners, where he develops and manages a broad range of rule-based strategies, in addition to being Lead Portfolio Manager of MAFO. He is a CFA charterholder and holds an MSc in Business Administration from Radboud University, Nijmegen.
Glazer adds that the secular growth characteristics and low penetration rates for new services in the sector position the industry well to exhibit less cyclicality than the broad market, which has been important in 2020 as global markets felt the wave of economic weakness caused by the coronavirus pandemic.
Accelerating growth
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For Wellington Management’s Bruce Glazer, who has been investing in the area for more than two decades, the growth in the breadth of opportunity has seen fintech evolve into a standalone investment sector: “When I started investing there was only a small handful of companies that you could define as ‘fintech.’ But as technology has evolved, it has become a much more dynamic industry”.
Technology and data are key drivers of success for many financial companies today, and this, combined with the fact that the fintech sector remains early in its growth, means it represents an obvious long-term investment proposition. It was with this in mind that Wellington Management launched the Wellington FinTech Fund in October 2018.
Disrupting industries
through the use of digital programs and analytics, it is also improving operating efficiency through the use of modern software applications.
ver the past decade, the merging of financial and technology services — or fintech as it is known — has transformed the way many financial businesses operate. Not only is fintech helping businesses to enhance customer experiences
O
“What is really exciting is that we are finally at a tipping point of enjoying benefits of new technology, like cloud computing, artificial intelligence and machine learning”.
As the majority of technology infrastructure within financial institutions is still decades old and legacy businesses are only just starting to invest meaningfully in cloud computing and modern software, Glazer expects the technology investment cycle to last years.
Indeed, it could create a decade of growth opportunities for the companies that sell these solutions into the financial services industry in particular. In addition, it is also easy to see why he defines the past few years as having kicked off a “golden age of innovation” in fintech.
Yet whilst the impact of Covid-19 on businesses will surely be felt over the short term, the pandemic could actually be a catalyst that accelerates a number of fintech trends already in place, according to Glazer.
Fintech
“New disruptors of legacy financial service companies have been enabled by the evolution of the internet, the advent of leaps in technology like cloud computing and machine learning, as well as the increased ability to reach a large and growing global middle class in search of new financial services”. (see graphic below)
The Fund is a way to directly invest in high-growth companies that leverage technology to enhance or disrupt traditional financial services.
However, there is a clear shift from physical shopping to e-commerce, which lends itself well to the increased adoption globally of contactless payments. Consumers have become more engaged with technology during the crisis, driving an increased usage of mobile wallets (peer to peer/P2P), branchless banking and ‘do-it-yourself’ services.
“The crisis is forcing consumers to embrace technology to adjust to the new normal”, says Glazer. “Additionally, it has highlighted the ease of managing and updating cloud-based infrastructure versus legacy on-premise technology. As such, we believe the recent weakness in the sector has created an attractive entry point in valuation based on normalised earnings that have come in quite a bit from what we saw at the end of 2019”.
We want to buy the bonds of firms making a real transition
Bruce Glazer, Lead Portfolio Manager, Wellington FinTech Fund
Glazer explains: “Unlike other industries where disruption can happen very quickly, people are conservative with the decisions they make in their financial lives. For example, 23 years after I started [in finance] I would not have guessed people would still use cheques to conduct banking business; or recruit programmers of 50-year-old coding languages to maintain legacy computer systems”, explains Glazer.
“Yet today financial services firms are increasingly under pressure from new entrants built on modern technology and consumer expectations are changing too”.
What makes the sector even more appealing is the fact that growth opportunities exist across the US, Europe and emerging markets, with each region offering different ways in which fintech disruption will play out.
Glazer notes the overall long-term winners of the sector will be a combination of new entrants that move fast and benefit from no legacy technology, as well as incumbents that have made the necessary investments in modern technology and have significant scale and data.
The Covid-19 crisis is forcing consumers to embrace technology to adjust to the new normal
“Covid-19 is driving severe economic weakness globally and the fintech industry is not immune; we expect financial results to suffer over the short term, particularly for those companies with consumer end markets”.
Analytics
Mobile
Social
Artificial Intelligence
Cloud
Software enabled payments
Internet of things
Payments
Insuretech
Regtech
Wealth tech
Real estate tech
Digital lending platforms
Capital markets tech
Key underlying technologies
fintech sub-industries
transformed the way many financial businesses operate. Not only is fintech helping businesses to enhance customer experiences through the use of digital programs and analytics, it is also improving operating efficiency through the use of modern software applications.
ver the past decade, the merging of financial and technology services — or fintech as it is known — has
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Bruce Glazer, Lead Portfolio Manager
Wellington FinTech Fund
Portfolio overview and return profile
Wellington Management
Fund objective
Past performance is not indicative of future returns, and an investment can lose value.
Source: *Morningstar. Figures in USD, class S USD Uhdg, net of fees. Category is Morningstar EAA Equity Sector Technology. Benchmark is MSCI AC World Net USD. Data as at 31 May 2020. Fund launch date: October 2018. Performance returns for periods one year or less are not annualised. | Fund returns shown are net of actual (but not necessarily maximum) withholding and capital gains tax but are not otherwise adjusted for the effects of taxation and assume reinvestment of dividends and capital gains. | Index returns are shown net of maximum withholding tax and assume reinvestment of dividends in line with the index provider's methodology. | The inception date of the USD S Accumulating Unhedged share class is 16 October 2018. Fund returns shown are net of USD S Accumulating Unhedged share class fees and expenses. Sources: Fund – Wellington Management, Index – MSCI. | If the last business day of the month is not a business day for the Fund, performance is calculated using the last available NAV. This may result in a performance differential between the Fund and the index.
Fund performance
Although performance since the Fund’s inception has been strong, the Fund management team understands there will be periods of volatility in performance and aims to construct the portfolio with a long-term orientation. “We would expect the portfolio to track earnings growth that we believe offers the potential for double-digit growth rates in the coming years, recognising it will not be a straight line and there will be periods where returns exceed earnings growth, like in 2019, and periods when it lags earnings growth, like in 2018”.
Fund team
The Wellington FinTech Fund is run by Bruce Glazer who has over 20 years’ experience of investing in the sector. He is supported by members of Wellington Management’s Global Finance and Global Technology teams, investment professionals who have expertise across multiple affected industries. Glazer notes: “We have a really diverse combination of skill sets and industry expertise that rounds my views on building a portfolio. The investment team members have spent decades researching the financial services industry and have deep domain expertise that helps me to understand the opportunities and challenges those business models face. There are also people on the team that have less tenure in the fintech industry but bring fresh perspectives and new ideas on ways in which the industry will evolve in the future".
The Wellington FinTech Fund seeks long-term total returns by investing primarily in companies globally that leverage technology to enhance or disrupt traditional financial services. The Fund uses fundamental, bottom-up analysis and active stock selection to build a portfolio of companies which the team believes have attractive business models, long-term growth potential and deep management expertise. The Fund aims to invest in three main areas of opportunity (see below). From a universe of around 500 stocks, the team identifies around 150 companies where 80% of revenues must come from pure fintech sources. The team then selects 35–55 high-conviction ideas to invest in.
Portfolio examples represent the largest holding in each theme as of 30 April 2020. These examples are for illustrative purposes only. The individual issuers listed should not be considered a recommendation to buy or sell. Holdings vary and there is no guarantee that the Fund will continue to hold any of the securities listed. Please refer to the annual and semi-annual reports for the full holdings. Source: Wellington Management.
Payments systems
(Largest holding: Global Payments)
Software-enabled payments
Cash-to-card shift
B2B payments
Omni-channel
E-commerce
Digitisation of Financial Services
(Largest holding: Costar Group)
Enhancing customer experience
Vertical-specific software providers
Industry platforms
Technology infrastructure
(Largest holding: Equifax)
Modernising core systems
Trading platforms
Process re-engineering software
Data providers
Source: FE Analytics. 16 October 2018 - 31 July 2020. All data in GBP.
Top 5 Holdings(1)
% of Equity
Portfolio(2)
Sources: Wellington Management (1) As at 30 April 2020. The individual issuers listed should not be considered a recommendation to buy or sell. The weightings do not reflect exposure gained through the use of derivatives. Holdings vary and there is no guarantee that the Fund will hold any of the securities listed. Please refer to the annual and semi-annual reports for the full holdings. (2) As at 31 January 2020. (3) As at 30 April 2020. Totals may not add up to 100% due to rounding.
Regional Distribution(3)
North America
Europe
Emerging Markets
Asia Pacific ex Japan
Japan
Middle East/Developed
Fund
Benchmark
67.7%
60.6%
20.5%
17%
7.9%
11.9%
2.1%
1.8%
7.2%
0%
0.2%
3.2%
Risk and Reward Profile
Highest Risk
Lowest Risk
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Discrete performance*
Source: FE Analytics. 16 October 2018 - 31 May 2020. All data in GBP.
Name xxxxxx xx xxxxxxx
How do you characterise the Wellington FinTech Fund?
A growth fund benefiting from the intersection of tech and finance
Bruce Glazer: The portfolio can be defined as a growth fund that looks to benefit from the increasing intersection of technology and financial services. There are several differentiating factors from other growth-focused portfolios, however. Firstly, we have a dedicated team that has been, and will continue to be, 100% focused on this sector. Secondly, our strong belief in the purity of the theme and the richness of the opportunity set means we set a very high bar.
Any company we invest in requires 80% of its revenue to come from fintech — this means there is no Apple or Facebook in the portfolio. Lastly, our concentrated positions and low stock turnover approach allows us to benefit from high-conviction ideas and the power of compounding over the long term.
BG: In looking for long-term opportunities, the goal of our research is to understand how the industry will evolve and which businesses are best positioned to sustain or enhance their growth rate over the next decade plus.
What is your investment process?
BG: We believe our opportunity set lends itself to finding companies that can sustain close to 20% earnings-per-share growth over the long term. We would expect the portfolio to track earnings growth over the long term, recognising it will not be a straight line and there will be periods when returns exceed earnings growth, like in 2019, and periods when it lags earnings growth, like in 2018.
What kind of returns can investors expect from the Fund?
BG: It is important to distinguish between stock price volatility and volatility of business fundamentals. The portfolio is comprised of very strong secular growers with extremely durable business models, and over time, the earnings growth of our businesses will drive returns.
What risk-management features do you apply to the portfolio?
BG: Clients should think about our portfolio as a growth fund focused on exploiting one of the most powerful and important themes across the global economy. Financial services is a massive industry ripe for disruption which we think will take decades to play out.
How does this Fund fit into a client portfolio?
We are drawn to businesses with deep moats given their scale, proprietary data, and innovative technology. Importantly, we need to understand the value proposition to the end user, and what the risks are to incumbents from new entrants and vice versa.
BG: We break the landscape up into three primary buckets: payments, technology infrastructure and the digitisation of financial services. Payments, which represents about 50% of the Fund, is aimed at capturing the shift from cash to card and should deliver between 15% – 20% growth.
Technology infrastructure, which represents around 30% of the Fund, is the fastest-growing segment of the portfolio. Companies in this category are leveraging the cloud, data and new tools like artificial intelligence and machine learning to drive innovation.
How is the portfolio structured?
Finally, we invest around 20% of the Fund in the digitisation of financial services. This part of the Fund is more modest in terms of growth, but offers more stability as companies automate and digitise previously manually intensive processes.
To manage risk, we are mindful of exposure to certain end markets, specific themes and geographies. And whilst we build the portfolio stock by stock, we also take a top-down view of these exposures when managing risk. We really want the underlying growth of fintech to be the primary driver of returns over the long term.
We believe the opportunity set is large and growing and so we have set a high bar, with 80% of a company’s revenue coming from fintech in order to qualify for ownership.
BG: Being involved in the sector really since its creation allows me the insight to appreciate what is needed for success. Wellington as a firm is among the largest active investors in fintech companies in the world, which has provided me with incredible access to management teams and unique research opportunities.
This is a very attractive sector and there are a lot of great ideas, but what it takes to gain traction and reach scale in this sector is quite different from other industries.
How does your experience of the sector help you in choosing the best companies?
Those challenges are often not appreciated by investors. I have also learned to appreciate the long runway for growth for the market leaders, which has underpinned my commitment to extending my time horizon when investing in this very powerful theme.
Our strong belief in the purity of the theme means we set a very high bar
For further information, please visit www.wellingtonfunds.com/fintech
Stock focus on: Electronic payment transactions
Electronic payment transactions have been growing at a staggering rate in the region — upward of 15% annually, more than 2.5 times the rate of GDP growth. This growth has been fuelled by the adoption and growth of alternative digital payment mechanisms (migrations of large pools of cash payments) in a strong push from regulators to reduce cash. One of the underappreciated elements of new apps, such as ridesharing apps, is how easy the payment experience is: consumers simply don’t have to think about the experience. Legacy financial services firms will have to invest in technology infrastructure to better match new customer experiences likes this, as well as customer expectations. It is a great time to be both a client and an investor in this sector.
Source: Wellington Management estimates. As at 31 May 2020.
60%
40%
Approximate percentage of consumer transactions globally still paid in cash
Approximate percentage of electronic payment penetration globally
