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Investing in fintech companies

Written by Hans Oudshoorn | 4 minutes
SAT 18-07-2020

Wirecard - the financial specialist in payment processing, card issuance, and risk management services - has negatively been in the news a lot lately. The reason? The stock was well above € 100 in the morning of June 18 but started the same day with an unprecedented 60% price drop when it was announced that the company had lost € 1.9 billion. In early July, the company - also known for the internet payment system. - is only worth a few euros on the stock exchange and is now fearing this will be the end.

Adyen - the Dutch counterpart of Wirecard - has also experienced this. Corona crisis or not, Adyen's share is one of the best-performing securities on the Amsterdam stock exchange this year, with a price increase of over 85%. In fact, the stock rose further as Wirecard's issues came to light.

Lately, I have been getting a lot of questions about the investment opportunities of the new generation of financials, also known as fintech companies or fintech. With this article, I would like to provide information for investors who want to add nuance in this area to the portfolio.

What is Fintech?
Fintech - or in English: FinTech - stands for financial technology. It is the application of technology in all kinds of modern ways of providing services, as long as it concerns the change of economic processes based on a value or transaction.

A common characteristic of fintech companies - usual startups - is that they compete with traditional banks, insurers, and asset managers with their state of the art technology. Due to outdated IT systems, these are often less flexible to respond to the rapidly changing wishes of the (digital) financial consumer. Another similar feature is that the fintech solutions offered can often be used in the form of an app on a smartphone or tablet.

A well-known app is Tikkie, which was introduced at the end of 2015. Although developed by the more traditional ABN AMRO Group, nowadays this way of making mutual payments is embraced by many consumers. Other, perhaps less well-known, fintech companies are Tellow - a financial accounting app for the self-employed and freelancers - and Oneplanetcrowd, a Dutch crowdfunding platform from and for sustainable companies and investors.

In addition to the special names of fintech companies and their solutions, it is also striking that these relatively young companies generally have a clear and direct form of communication towards all their stakeholders and have a good eye for sustainability.


Strong growth in the fintech market
In a previous article, I zoomed in on the opportunities of investing in the digital economy, within this development fintech companies form a 'niche'. The Business Research Company - a research agency headquartered in London - in their 'FinTech Global Market Report 2020' survey estimated that the size of the fintech market in US $ in 2018 is 127 billion and that the size in 2022 will be around an estimated US $ 310 billion in 2022. In short, a robust development for this market with an annual increase of almost 25%. And that offers opportunities for investors.

 

Invest in Fintech companies?
You can of course buy the aforementioned shares of Adyen and also the Dutch CM.com or of the English Funding Circle Holdings. However, investing in individual stocks is generally riskier than diversified investing through an investment fund or ETF. And especially if it is a relatively early growth market. Because whatever the reason, there will be companies that, like Wirecard, will not make it to the finish line.

As the sector is, as said, at the beginning of development, the range of investment funds and ETFs (for private individuals) is not yet widespread. During my search, I came across two investment titles to accentuate and anticipate the expected growth of the fintech market within the portfolio: the Robeco Capital Fintech Equities Acc fund (ISIN LU1700711077) and the BlackRock Global FinTech Fund Acc ( ISIN LU1917163450).

Robeco's fund usually has 40-70 shares worldwide (currently S&P Global, Evertec, and Intercontitental Exchange) in its portfolio, while BlackRock's fund has around 50 shares worldwide (now including Paypal Holdings, Worldline, and Fidelity National Information Services). The ongoing charges are approximately 0.96% (Robeco) and 1% (BlackRock) per year. Both funds are quoted in euros and can be traded via BinckBank - also Fundcoach - via investment fund exchange FundSettle.rs.

The primary objective of both investment funds is to beat the performance of the MSCI All Country World Index (ACWI) Net Return (EUR) index. Robeco has been successful since the fund was launched in November 2017. BlackRock's mutual fund has also outperformed the benchmark since its inception in December 2018. Due to the short existence of the funds, they logically do not yet have a star rating at Morningstar.

However, the approach and results so far have been encouraging. Also nice to know: Robeco and BlackRock have several theme funds with very good ratings on the shelf. In other words, both fund houses have had a good eye for 'markets of tomorrow' before. The dividend, for both titles approximately 0.5% -1.5% on an annual basis, is automatically reinvested.

What else? Both names invest in shares that score well on sustainability and have a smaller carbon footprint than their peers. Overall, both funds receive three globes for the Morningstar Sustainability Rating ™.

Risks
And the main risks? You are of course exposed to market risk. When financial markets are under pressure, you will experience that too. 

There is also a currency risk. The funds are quoted in euros, but they contain many foreign companies. In the event of a currency headwind, this may mean that the American exchange rates do rise, but that there is no profit in euros. 

Briefly, the titles are interesting for long-term investors who can and want to bear equity risk. And who wants to add a nuance with their investments and want to pre-sort the financials of tomorrow with essential diversification. Interested in additional information? Click  here for more information about Robeco and here for more information about BlackRock.

 

Investing comes with risks. Your investment could decrease in value.

Author

Hans Oudshoorn

Hans Oudshoorn is investment trainer at BinckBank. He wrote the Dutch book 'Beleggen voor Dummies' and writes columns in several Dutch newspapers such as DFT, FiscAlert and NRC Handelsblad. 

The information in this article should not be interpreted as individual investment advice.  Although BinckBank compiles and maintains these pages from reliable sources, BinckBank cannot guarantee that the information is accurate, complete and up-to-date. Any information used from this article without prior verification or advice, is at your own risk.  We advise that you only invest in products that fit your knowledge and experience and do not invest in financial instruments where you do not understand the risks. 

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