We inaugurate a new column on your DigiBook to help you follow market penetration of big tech companies, named GAFA – for Google, Apple, Facebook, Amazon, to which are sometimes added Netflix and Microsoft – in the U.S. and BAT – for Baidu, Alibaba and Tencent – in China.
Indeed, according to many experts, these large global technology firms are expanding rapidly and, as Moody’s recently indicates “threat of disruption is real” [1]. In their central scenario, financial incumbents will cede a portion of control over retail financial services distribution. However, depending on regulatory changes, customer preferences and big tech firms’ expansion appetites, an alternate scenario exists in which these new competitors firms would control a larger share of distribution and manufacturing, displacing incumbents that fail to execute timely effective digital strategies.
You will find hereunder the latest news of these big tech firms’ advances in the asset management industry.
Funds distribution: speculations in the U.S. ...
Analysts at the research house Sanford C. Bernstein & Co estimate that Amazon is well-placed to move into selling funds to retail investors thanks to the 100 million subscribers to Amazon Prime service.
If so, it would spark a price war that could slash asset managers’ profit margins still further. But, because the potential revenue would not outweigh the risks to reputation, Bernstein thinks a foray into asset management is most likely to occur in the form of fund “supermarket” or robo-advice, negotiating probably a significant discount. Bernstein pointed to a recent survey by online marketplace LendEDU, which found that 37% of Amazon Prime users would use an Amazon robo-adviser if one existed, while 41% said they would choose an Amazon retirement savings account [2].
… but Alibaba and Tencent make it real in China…
Alibaba, its Chinese rival, already offers a robo-advice service through its Ant Financial arm, which has $345bn of AuM. The service allocates across a range of asset classes and boasts the world’s largest money market fund, Yu’e Bao, which had around $200bn in assets at the end of August 2018.
Ant Financial is going further. After having targeted individuals, it has accelerated its pace of opening up its technological capabilities to financial institutions. In June 2017, it launched CaifuHao, an AI-powered marketplace for third-party financial institutions.The platform is accessible via Ant Fortune, the company’s investment smartphone app, which notably offers users information about stocks or access to Yu’e Bao [3].
With its AI functionalities, CaifuHao corporate accounts provide fund managers with a channel to better connect, engage with users to build their own brands and offers tailored wealth management services to“ordinary” customers. Indeed, by opening a CaifuHao account, an Asset Manager can directly communicate with its customers and learn about them, share relevant information, including investment tips, answers its questions and make customized recommendations for various financial products that meet customers’ individual needs.
And it is successful! In one year, 27 fund management companies have been able to increase their operational efficiency by 70% while reducing their overall costs by 50%. Additional benefits include a 10-fold increase in the number of daily visitors, a three-fold increase in the amount invested by returning customers, and an 89% increase in the holding period among all investors [4]. In June 2018, Ant Financial Services Group announced that it will open up its artificial-intelligence-driven platform to the wider fund industry in China.
In September 2018, Ant Financial announced that it is ready to offer a full suite of AI capabilities, technology products and services to a growing ecosystem partners in the financial industry under a new brand: Ant Financial Technology. It will cover five product portfolios, namely large-scale financial transaction technologies, financial security technologies, financial intelligence technologies, next-generation interaction technologies and blockchain applications. This news comes on the heels of the firm's announcement in June of a $14 billion funding, one of the biggest capital raises on record, to develop its blockchain, AI, security, IoT, and computing capabilities to upgrade its global technology platform.
Tencent has its own equivalent, Li Caitong. In January, Tencent was granted its first fund sales license in China, allowing its wealth management platform to directly distribute public funds, and has seen a flurry of firms rushing to onboard their products with them.
To read our former article on e-Wallet, click here
… and in India
Paytm (an e-commerce payment system and digital wallet company funded by Alibaba and SoftBank) launched a mutual fund app in September 2018: Paytm Money. The app allows to buy and sell funds, and will soon introduce “investment packs”, an option that recommends schemes based on the clients’ profile. It initially embeds schemes and direct plans from 25 fund firms, including SBI Mutual Fund and all the other big industry players, and will cover about 90% of the industry’s Rs22 trillion ($307.3 billion) of assets under management [5]. Paytm Money already has 850,000 registered users.
To read our former article on Paytm, click here
Research & investment process: social media
own the data
Alternative data held by social media firms are key to power advanced analytics, research and AI-driven investment process. Facebook or Twitter are in the frontline of this market. For the moment, according to Oliver Wyman, there are not a lot of exclusive partnership deals. But these companies are looking for new ways to monetize their data, and they may find it attractive to provide exclusive data sets in exchange of alpha.
If it could be a financial windfall for big tech firms, asset managers could also benefit from exclusive deals. First, because alternative data are unstructured, Asset Managers are forced to make significant investments in their own advanced data analytics tools to gain an information advantage. Second, if everybody has the same data, it is harder to generate a competitive edge without building significant in-house resources and recruiting data scientists. Buying bespoke data should make it easier for fund firms to extract value from alternative data feeds. And it’s a huge market: according to alternativedata.org, total global buy-side spend on alternative data is estimated to increase 2.5 times from an estimated $656m this year to $1.7bn by 2020.
Investments: Big tech firms have colossal cash
pile to invest
“Apple is a Hedge Fund That Makes Phones”: behind this provocative headline of a Wall Street Journal’s article [6] lies the fact that Apple is one of the world’s largest investment companies: Braeburn Capital, its wholly owned subsidiary, manages a $244 billion financial portfolio—70% of Apple’s total book assets. Apple acts like a hedge fund by supporting this portfolio with $115 billion of debt. In particular, Apple has recently invested to serve its ambitious long-term goals for reducing its environmental impact. After its investments in wind and solar energy projects in the US, as well as in Japan and China, Apple and some of its largest suppliers teamed up to launch, in July 2018, a new $300m “China Clean Energy Fund”, managed by DWS. To read our former article on Apple, click here
GV, formerly Google Ventures, is the venture capital investment arm of Alphabet Inc. and provides seed, venture, and growth stage funding to technology companies. Its latest AuM is estimated to $2.4bn. With Japanese telecoms company Softbank, it has recently invested $11.5m into Yieldify, a two-year-old e-commerce startup that helps online retailers convince people to buy products online.
Fund management: Tencent gets started in HK
The JV between Tencent and Hillhouse Capital – GaoTeng Global Asset Management – obtained in June 2018 approval from Hong Kong’s Securities and Futures Commission to manage retail funds. GaoTeng is focus on providing asset management products to overseas Chinese investors. A few months later, in October, GaoTeng Global Asset Management, has registered its first retail fund in Hong Kong under a new “WeFund” – alluding to “WeChat” – umbrella. The first fund in the series is the GaoTeng Asian Income Fund.
Services: data storage concentration creates systemic
risk
Several large asset managers have started using Amazon Web Services (AWS) for their data storage and transaction services – the e-commerce giant’s cloud platform – namely Legal & General IM, T. Rowe Price, Vanguard and Fidelity. Amazon offers a variety of software tools on top of its cloud product, making it harder for firms to switch between cloud providers. The majority of the City either uses AWS or Amazon’s main rival, Microsoft Azure, which serves 85% of systemically important banks.
But, because AWS already provides its cloud services to Nasdaq, all of the Fortune 50 companies, banks (including Citigroup, JPMorgan and HSBC) and regulators (such as the UK’s FCA and the Financial Industry Regulatory Authority in the US), a major collapse or hack could wreak havoc, creating a systemic risk.
To be continued.
Author: Pascal Buisson - November 2018
[1] Moody’s Investor Services – 25/09/2018 - [2] Financial News - [3] TechInAsia.com - [4] BusinessWire.com - [5] livemint.com - [6] Wall Street Journal – 23/08/2018
