Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Asian financials face ‘slow death’ unless they innovate
While Asian financials will benefit from the world’s fastest growing middle-class, they also face massive headwinds from fintech disruptors and the looming threat of central bank digital currencies.
Asian financials are still an important sector for investors and one that is poised to benefit from the region’s emerging middle-class and greater wealth accumulation in developed Asia.
However, according to William Pang, investment analyst at Capital Group, three trends are stymying higher returns for shareholders: prolonged periods of low interest rates – “Japanification” – making it harder for them to make money through their core lending businesses; “inexorably tighter regulation”; and, disruption by Asia’s more developed fintech players. Combined, they mean banks and financials face “massive headwinds”.
Pang told a webinar for investors last week (July 7): “Fintech 1.0 focused on digitalising existing products, so whatever you could do offline you could now do online – but the product proposition was still the same.
“I think we’re seeing the rise of Fintech 2.0, which is not only focusing on digitalising existing products but using technology to manufacture and offer more innovative products that didn’t exist before.
“We are seeing a proliferation of challenger digital banks across Asia, we are seeing digital insurance companies emerging. Online broking is interesting because we’ve already seen the first wave of disruption – the brick-and-mortar brokers are disrupted by the online discount brokers – and now we’re seeing another wave of disruption from mobile-first, social-led brokers like Robinhood. I don’t think any vertical within financials is safe from disruption.”
For that reason, Pang expects more startups will receive venture capital and private equity funding and that an increasing number of them will go public. And while there is still time for banks to mount a “compelling response” to the new wave of disruption, they will need to be technology leaders and invest heavily in digital acquisition.
Andy Budden, Capital investment director, said: “We have seen an acceleration from some select organisations in recent years. It’s something that’s starting to play out in results now. Something that struck me about Bank of America’s results recently was, if you look at their consumer sales for the last year, 49 per cent of it came from digital channels and that was up 33 per cent on the year. That’s really important as they try to fight for deposits to keep their business alive and thriving…banks need to innovate or potentially die a long, slow death.”
While Capital Group has no house view on crypto currencies – Pang himself believes they have the potential to “disrupt the status quo of the centralised financial system” – it does have a growing interest in the creation of central bank-regulated digital currencies.
About 50 monetary authorities globally are looking into them, while around half that number have trials underway, with Budden saying the development “could be a game changer” for both states and financial institutions.
He said: “You can accelerate financial inclusion and you don’t have to pay for the physical issuance of currency anymore… but it’s very important for the commercial banking sector, and the risk here is that deposits migrate from the commercial banks to the central banks.
“And why wouldn’t they? It’s got zero default risk. But once the deposits go from the commercial banks, it undermines their ability to lend and potentially takes the lending function to the central bank, which is rather intriguing.”
