James Bevan: Fintech and its lessons for investors
0Helen Wildsmith and I recently visited Cambridge to advise the University on some of its investing conundrums, and one of the issues that arose in conversation was the changing nature of business and risk including the impact of technology.
We didn’t discuss so-called ‘Fintech’, the use and application of technology in the field of finance, but it’s a fascinating area of development and the spread of multi-currency accounts, feasible with blockchain, the software behind bitcoin, will speed up transactions processing, reduce back-office expenses and threatens the very role of central banks, and the effectiveness of monetary policy.
At Davos, JP Morgan Chase’s CEO Dimon endorsed blockchain technology, and has now entered a “trial project” that will use blockchain to allow the bank to trade loans less expensively and with less hassle.
If the project is successful, there’s hope that blockchain can be used to speed up the sale and settlement of other securities as well.
Autonomous Research estimates that the global investment banks now spend about $50bn per year on post-trade processes, and blockchain technology could reduce that figure by a third.
Digital Asset is developing blockchain technology and the Financial Times has reported “…efforts to improve the speed of settlement led to ‘reduced capital requirements, lower operational costs and improved client experience’”.
Meanwhile, R3, a consortium of 42 investment banks, has been testing the technology, and eleven investment banks used blockchain last month to execute mock trades with each other without the need for a centralized third party as reported by Business Insider on 20th January. The 11 banks involved were Barclays, BMO Financial Group, Credit Suisse, Commonwealth Bank of Australia, HSBC, Natixis, Royal Bank of Scotland, TD Bank, UBS, UniCredit, and Wells Fargo.
Blockchain could prove disruptive, removing intermediaries and expense from many different types of financial transactions, including trades and payments. It is just one example of how the world is moving quickly and the industries of yesteryear, which dominate cap weighted indices, are likely a poor reflection of what lies ahead – and, by extension, passive tracking of cap weighted indices will tether investors in the past, rather than seeking profitable participation in the future.
Far better surely to have a portfolio of great companies that can participate in fomenting growth, accepting that there will likely be significant variation from cap weighted indices both in make up and performance, and investors that recognise this will have to accept that from time to time the performance variation will be negative even if the long term advantage ends up being highly significant.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
*CCLA is a supporter of Room151
