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Lion’s innovation fund quantifies disruption

Which financial institution – there’s only one – does Lion Global Investors’ innovation fund say is truly disruptive?

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Only one financial institution worldwide currently makes the cut in Lion Global Investors’ Disruption Innovation Fund.

S.K. Selvan, senior portfolio manager for multi-asset strategies at the Singapore-based fund house, says the fund captures listed companies that are rewriting the rules, challenging incumbents and bucking industry norms across industries.

Although that includes finance, he says banks and insurance companies are all going to be among the disrupted, especially as regulators continue to promote fintech and other innovation.

The single exception included in the fund’s portfolio is...

But hang on a moment.

First let’s understand how the portfolio has been conceived, and the team’s view on financial services.

Selvan, who joined Lion in 2014 after running portfolios for the asset-management arms of Nomura and Nippon Life, among others, says the idea behind the fund is twofold: to develop a methodology to capture disruptors, and to advance innovative ways of selling the product.

The methodology
Asset allocation is quant-driven, but Selvan and his colleagues scour sell-side research and other sources to determine what companies should be included in the eligibility universe. They ignore common benchmarks like the MSCI World Index and instead bracket the world into 15 categories, such as autonomous vehicles or blockchain, and seek companies that are sustainable, have proven business models, and commercialized tech, which usually comes down to their use of data.

“I’m more like a project leader than a portfolio manager,” Selvan said.

The team now has about 500 listed companies in its universe, and continues to add new ones, particularly as new companies list. The team is developing its own “disruptors benchmark” of stocks.

It does so based on several factors, including:

  • Fundamentals – this includes market cap, as the team wants companies that scale;
  • Earnings per share (EPS) and sales growth – the team pulls data from Bloomberg and Reuters terminals, and tracks earnings momentum;
  • Price volatility – Selvan says true disruptors, such as Amazon and Apple, are not volatile stocks, and when a company hits a rocky stretch, it’s appeal, and therefore the portfolio’s allocation, declines;
  • Price-to-sales – Although most listed companies can be valued traditionally through price-to-earnings ratios, Selvan says many innovative companies are more interested in gaining traction through revenues than in profitability. But price-to-sales multiples show where the momentum lies. Amazon is the poster child for this approach.

Once the team has curated the eligible companies in what it views as big-theme disruptive plays, it lets algorithms based on the above factors determine weightings. The algo decided to cut its exposure to Facebook; the team decided Tesla was no longer a disruptor.

Fintech’s long play
Selvan says banks and insurers will be disrupted, but there are few good investment ideas to leverage that belief. Many of the more intriguing companies are still private. The fund has resorted to proxies to capture the blockchain movement, including Amazon and Baidu, as well as consumer tech companies like GoJek and Lazada for payments.

Selvan says payments remains the hottest area for disrupting finance. “The world is going cashless,” he said, noting how digital payment companies in China have bypassed credit cards. For now credit-card companies are, overall, huge beneficiaries of trends in payments, as many fintech solutions continue to use their networks. But in the retail world, as the likes of Alibaba and Amazon open cashless stores, they will look to put shoppers on their internal payment rails.

They acquired 200 million digital customers

- S.K. Selvan, Lion Global

Artificial intelligence is another theme reshaping finance, Selvan says, noting the potential for “digital assistants” like Amazon’s Alexa and GoogleHome to supplant interactions with banks. RegTech for KYC, account opening and fraud detection are going to remain hot areas.

Other parts of the fintech world have lost pace: Selvan’s team this year removed Lending Club and CreditEase, as they decided peer-to-peer marketplaces for loans weren’t sufficiently disruptive, or not commercially attractive.

Disrupting fund disruption?
The second aspect of the Innovation Fund – to run the business along innovative lines – has been harder to realize. Since its launch in early 2017, it has gathered only S$40 million (US$29 million) of assets.

Initially the fund was sold through Singaporean online distributors such as Fundsupermart and Dollar Dex, in part because they don’t charge the high front-end loads that bank distributors require. More recently, OCBC (the parent bank of Lion Global Investors) and RHB have added the fund to their shelves.

“It’s frustrating,” Selvan admits, saying distributors have a hard time categorizing the fund. “Distributors still hold that power, because funds are still sold, not bought.”

He says the mission of the fund is to give ordinary people a chance to benefit from the innovation of the world’s biggest disruptive companies. The fund’s minimum investment size is a miniscule S$100, and Selvan says Lion is trying to attract first-time investors with a clear story. “This is the story of the fourth industrial revolution, and that’s something that resonates with young people.”

Lion is launching the product in Malaysia later this year, also beginning with online distributors, with Indonesia next.

The exception
Overall, Selvan and his team are skeptical that banks and insurance companies will win from the erosion of fees that digital and data will continue to force.

So far they’re not convinced by crypto stories either, as companies launching tokens don’t look viable or able to attract the mass use they need for their coins to sustain value. Although many top-flight investment banks like to say they are tech companies with a bank license, Selvan doesn’t think that makes them disruptive.

The exception is Ping An Insurance. “They’re a traditional Chinese insurance company, but they’re on top of Internet 3.0,” Selvan said “They acquired 200 million digital customers in just three years.” And Ping An will continue to spin off attractive fintech businesses like digital wealth-management platform Lufax.

The team is also keen to see the likes of Ant Financial go public so it can also be added to the eligibility universe.

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Lion’s innovation fund quantifies disruption