Thematic investment returns of 30%-40% in Digital Payments

VeroPay App

Fintech investment opportunities for our portfolios are growing. In this post, I won’t dive into investment opportunities in private markets, like those through crowdfunding platforms, or through lending marketplaces, and won’t touch upon the emerging asset class of cryptos. Even though the number of articles around these investment opportunities on Seeking Alpha has skyrocketed over the past year, today I want to look only into the public markets and specifically in the Digital payments subsector which is the largest area not only in terms of number of Fintechs but most importantly in terms of adaptation rate from incumbents and end-user penetration. This is the reason that there are a few thematic investment vehicles already offered from the universal and private banks and Fintechs, focused on capturing the huge investment opportunity through trackers, certificates, and motifs. The second batch would be around themes of lending, crowdfunding, and lastly robo-advisory.

Digital payments subspace growth and potential, comes from growing e-commerce, high cash usage implying lots of room for electronic payment adaptation, omnichannel adaptation, growth in value-add services like loyalty programs, and increased security needs.

Three kinds of investment instruments

 7yr certificate with dynamic rebalancing of basket

UBS and Credit Suisse offer a performance linked equity certificate. It is a 7yr certificate that was issued in late 2014 and expires in 2021. It is linked to the AtonRâ Digital payments basket that is rebalanced on a monthly basis. AtonRâ is a Geneva independent research firm with an innovative thematic focus (e.g. biotech, AI and robotics, digital payments, global defense and security etc).

These certificates have had a decent cumulative performance for the first 3 calendar years (part of 2014, 2105, 2016) of around 10%. The explosive growth has been reflected in the returns year-to-date. 2017 has spiked up over 40%!

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UBS certifcate in USD

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Credit Suisse certificate in EUR

The holdings of the underlying portfolio aren’t transparent. They are published in the conventional monthly performance report. From one of the recent ones, the top holdings and best performers, offer us some insights in understanding the returns and the exposure.

Alibaba ADR (BABA) and Qiwi ADR are both top holdings and top performers for the month of June. No need for an intro to Alibaba and the only public way to invest in Alipay. Qiwi is a Russian payment service provider focused on serving primarily Russia, Ukraine, Kazakhstan, Moldova, Belarus, Romania, the United States, and the United Arab Emirates. It is publicly listed on the Nasdaq and of course, the Moscow Exchange (ticker: QIWI).

Celio, the largest Brazilian credit and debit card operator player in Latin America by revenue and market value, is the another top performer this past month. Listed only on the Bovespa BVMF: CIEL3.

Square and Global payments, a Fintech and an incumbent, are the other two top holdings of the AtonRâ Digital payments basket. Square is already 8 yrs and is one the significant Fintech players both in hardware and software for merchants and small businesses
(NYSE
SQ). The other US is nearly 50yrs old with a truly global footprint (GPN (NYSE)).

1yr certificate with a fixed basket

Julius Baer’s 1yr tracker certificate on a digital payment basket is soon expiring (Sep 6, 2017). It was a transparent structure with 12 equally weighted holdings that were mostly incumbents rather than pure Fintechs; and procuded over 30% returns.

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Source

The above holdings (in the left column) have been revised for an upcoming new tracker with the same number of equally weighted holdings and 4 revisions (in blue):

Maturing Sep 2017 To be issued in Sep 2017
Apple Inc Total System Services
Worldline SA Worldline SA
Mastercard Inc Mastercard Inc
Alphabet Inc Tencent
Global Payments Inc Global Payments Inc
Alibaba Group Holding Ltd Alibaba Group Holding Ltd
NXP Semiconductors NV Square
PayPal Holdings Inc PayPal Holdings Inc
Worldpay Group PLC Wirecard
Vantiv Inc Vantiv Inc
Ingenico Group SA Ingenico Group SA
Visa Inc Visa Inc

This basket is only composed of ADRs (no other currency exposure) and more incumbents. The rebalancing is effectively annually reinvestment decision is left to the investor.

Motif

For US retail investors only, Motif offers for $9.95 the “Digital Dollars” motif-basket that is fully transparent and dynamic. It is rebalanced quarterly and its holdings are market-cap weighted with only US listed companies. Currently it has 20 holdings with a heavy focus on the card network segment. The current segment breakdown is:

Screen Shot 2017-08-28 at 10.18.08 AM

The one year return is over 30%. The holdings, weights, and returns are:

Screen Shot 2017-08-28 at 10.19.58 AM.png

Screen Shot 2017-08-28 at 10.20.21 AM

What is more important is that Motif offers an optimization algo that allows users to take stocks that can be considered players in the mobile payments space (which are 26 US listed stocks) and optimize (holdings and weights). This is a great tool for DIY thematic investing.

Our take

Global exposure in the digital payments space by including companies that are not listed in the US, has paid off. Rebalancing is necessary as the space is crowded and evolving with new value-add services. Frequency of rebalancing is not a no-brainer.

Lets watch whether Amazon sneaks into these baskets. In any case, the Amazon effect is lingering as AtonRâ research points out:

Looking further out, Amazon’s announced entry in the physical retail space through the acquisition of brick-and-mortar retailer Whole Foods Market is likely to have a major impact on the traditional checkout experience in most stores and to foster mobile payments. Indeed, it’s likely that Amazon will bring its Amazon Go concept (which uses notably computer vision and sensors to skip the checkout line and automatically debit the shopper’s Amazon account) to Whole Foods in the future, putting pressure on traditional retailers to follow suit with a seamless, mobile-based checkout experience.”

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

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