Not much has changed in the way investors allocate their liquid wealth to Fixed Income. We have discussed on Daily Fintech why P2P loans is a fixed income alternative contestant that for multiple reasons remains underweight even in the more mature US market.
Check out what Hector Nunez, a genuine P2P retail investor out of NY, invested in Back to the future of P2P Lending, we interview one of those peers.
Check out our more on the kind of direct and indirect investment vehicles out there in the P2P space (pure or hybrid) in A little bit of P2P is all I need – Mambo in Lending.
I personally, have an affinity to Fixed Income simply because it is the world that I was thrown in on Wall Street (both on the bond side and the structured product side). Last month, I covered the M-Akiba bonds in Government Bond Innovation: Africa puts the rest of the world to shame an innovation for retail investors that gave access to government debt in very small denominations and only via the mobile.
In that post, I also reviewed the consolidation trends in the Fintech sub-vertical that focuses in the B2B bond market. Digitization services offered by Fintechs that either add value to “How bonds are issued” or “How Bonds trade”. In other words, both in the primary market and in the secondary market. The latter companies are focused on solving price discovery and liquidity issues that persist in the market. Really fighting against a culture that dictates asset owners to resist transparency and to stick to a Buy-Side approach of dealing only if there is an existing relationship. Paul Reynolds, Bondcube’s CEO (a transparent bond platform that failed) sums up the issue very clearly:
“When matching indications were found, Bondcube worked by opening up an anonymous negotiation process between the counterparties.
But old habits die hard. Investors would much rather take competing prices from dealers than each other. It is a sign that asset managers, which now hold the vast majority of outstanding bonds, are uncomfortable being price makers rather than price takers. Being a liquidity provider is not in their mandate.”
Peter Drucker famously said that “Culture eats Strategy for breakfast”. The Boncube example in bond markets lends itself to (Source)
“Culture eats Tech for Lunch”
This is one way to describe the Fixed-Income conundrum facing all innovators in the primary and secondary market bond market.
Optimization of the Fixed-income portfolio
Let’s now focus on the end of the bond market spectrum, where fixed-income portfolio need to be created, optimized, and managed. Financial advisors or asset managers typically use either tools from the Bloomberg terminal or Thomson Reuters Eikon analytics. There aren’t many Fintechs that are brave enough to tackle this part of the WealthTech because this is not low hanging fruit. The bond market has numerous assets, data has multiple challenges, structures are not standardized and portfolio & risk management models are complicated. Government bonds, corporate bonds, embedded options, structured products like mortgage-backed securities, asset backed securities, etc
BondIT is a Fintech out of Israel that is focused on creating, optimizing and managing bond portfolios for financial advisors and asset managers. Their messaging reiterates
“Use BondIT to generate customized bond portfolios in 90 seconds”.
A strong message for a process that typically takes days to generate bespoke solutions.
BondIT uses ML and AI for the optimization of portfolios and was named one of the Top 10 Portfolio Analytics Solution Providers for 2016 by Capital Markets CIO Outlook magazine. They also recently won the Asian Private Banker’s recognition as the Most Innovative Solution.
BondIT is tackling the inherent data challenges in the bond market (multiple structures, currencies, jurisdictions); and also looking at the multiple parameters in constructing a bond portfolio (e.g. rating, spread, duration, liquidity, sector, currency etc).
BondIT can be accessed by financial advisors or small to medium size asset managers as a Saas Web based solution. For large enterprises, they can also offer an on-premises solutions.
BondIT has been building partnerships with data providers that are crucial in the bond portfolio management process. Recently, they struck a partnership with WindInfo the Shanghai based financial data provider. This is important as China’s bond market has grown to become the 3rd largest in the world, with $9.4 trillion in outstanding debt. Bloomberg announced in the beginning of this year that they will include RMB- denominated China Bonds in two Barlcays Fixed income indices. Bloomberg Barclays Benchmark Fixed Income Index family now will include two hybrid indices:
- A combo of the Bloomberg Barclays Global Aggregate index + the China Index
- A combo of the Bloomberg Barclays EM (Emerging Market) Local Currency Government + China Index
The China Index was introduced in 2004 and contains fixed- rate Treasury, government-related (including policy banks), and corporate securities that are listed on the China Interbank market.
BondIt is a London StartupBootcmap 2015 alumni. I heard them pitching at the Fintech Forum in Sep 2015 in London. In the summer of 2016, they joined the OCBC bank’s Fintech accelerator program. As a result the BondIT platform will be piloted by the Bank of Singapore’s relationship managers by providing them on the spot recommendations for their customers, on what bonds to invest in.
We will be watching how the Asian private bankers (a market using heavily fixed income structured products) evaluate and adopt the BondIT Saas solution. We don’t see that BondIt will face the “Culture eats Tech for Lunch” challenge. BondIT needs to move decisively in marketing their value proposition and stepping up to take advantage of the reality of reduced IT support in the fixed-income analytics & risk management areas of the Bulge bracket firms. The latter is a result of the shrinking of businesses like bond market making and running bond books, due to regulatory changes after the subprime crisis. BondIT needs to go get the asset managers that have been left in the cold in the cold in the post-Volcker rule era.
Efi Pylarinou is a Fintech thought-leader.
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