Preparing for 'Brexit'
Unfortunately it wasn’t just the torrential downpours that dampened spirits in June: the UK’s EU in/out referendum on the 23rd likely won in this regard. With markets around the world pricing-in a higher probability of ‘remain’, ‘Brexit’ caught many by surprise. On the morning following the result, markets plunged. In the spate of a few days Sterling dropped nearly 11% against the dollar; the FTSE-250 – the UK’s more domestically focused smaller-cap market – sank over 13.5%. The ensuing political mayhem left heads rolling from the spectrum’s left, right and centre.
Although markets have largely recovered since the result, Alex Crooke of The Bankers Investment Trust was cautious in the run-up to Brexit. He and the board of directors – a unique, independent, client-focused feature of investment trusts – decided almost a year ago, without taking a view on the outcome, that it would be prudent to pair-back risk and reduce Bankers’ exposure to the UK. It proved to be the right decision.
It highlights the advantages of a global generalist such as Bankers: with its mandate to invest in any stock market in the world, Alex is unrestrained and can shift capital to where he finds the best value.
The land of opportunity
In a shifting picture of asset allocation for the portfolio one region that remains a high weighting is the US stock market. It is by far the largest equity market in the world. The economy is growing at a faster clip than any other developed economy, and predicted to continue as such for at least the next few years. House prices continue to rise, consumer spending is firm, and the jobs market is strong with the Fed believing it near full employment.
For Alex, while the economic picture is important the portfolio’s focus is to uncover promising stocks at reasonable valuations. The focus for the US sleeve of the portfolio has been growth-at-the-price (GARP) - companies in the growth phase of their development but where the implied growth appears not to be overvalued.
Stocks are picked with the help of a number of overarching themes. Investment themes describe where perceived long-term trends underpin the growth of a particular area of a market, for example where fund managers believe the application of a new technology or government policy will continue to drive consumer demand in a particular market for many years to come.
Card or cash?
One such theme is Paperless Payments. It represents the classic scenario where technology is an enabler for ‘convenience’. It regards the shift from cash payments to digital payments on debit and credit cards, and is coupled with the adoption of newer technologies, such as Apple Pay, in developed economies and mobile payments in the developing economies.
Aside from convenience and time savings for users, electronic payments are more reliable and secure, and can reduce transaction costs for businesses. Customer retention is likely to be higher, with those more willing to stick with a company or website where they have formerly entered their personal details. This potentially increases sales and encourages larger transaction amounts, explaining why cash as a percentage of transactions continues to shrink (see chart) while mobile payments have been rising at a compound annualised growth rate of more than 50% since 2010.
More than just 'touch and go'
Electronic payments in all formats are increasing, whether it be swipe technology, chip and pin, or more modern NFC-based (near field communications) touch and go technology – either via a bank card or a mobile device with pre-loaded bank card credentials. Mobile phone-based financial services are allowing people to bank without a formal bank account. For example, branchless banking service M-Pesa, which operates in developing countries such as Kenya, India and Afghanistan, allows users to send secured SMS text messages to pay for goods and services. Customers can also deposit or withdraw funds from a network of banking agents, which include retail outlets and airtime resellers. The system also serves to reduce fraud and is important for many developing countries as the trade across this banking system can be included in GDP calculations.
Visa and Mastercard
Notable holdings for the portfolio include the leading global payment networks, Visa and Mastercard. Alex and the team think both companies have exceptional financial track records since their initial public offerings in 2006 and 2008 respectively. The companies have high barriers to entry – how difficult it is for potential competitors to enter the market – and most new payment options will be run on Visa/Mastercard’s networks. Furthermore strong long-term growth appears underpinned by a move away from cash.
WEX, the US-based corporate payment solutions provider, is another notable holding. They have been consolidating the fragmented vehicle fleet and fuel payment system in the North American market, and replicating this success elsewhere. They have diversified into other specialised payment areas including virtual cards, food cards and travel and healthcare, and have a track record of strong revenue growth.
We also have a significant position in Apple, but at present payments revenues remain a very small percentage of this business. Apple clearly has an important part to play in the payments industry, as it is seen to be a leader in NFC-based mobile payments, but our investment case for holding the stock is not currently based on the strength of the Apple Pay offering.
So with 85% of the globe still using cash – Alex and the team think this is an investment theme for the long-term.