By Daniel Lanyon on 30th July 2018
Is banking heading for a ‘Kodak’ moment? Janus Henderson’s technology fund management team think it might just be around the corner.
UK fintech firms could see a huge period of growth owing to the increasing capability of artificial intelligence and cloud computing technology, according to Richard Clode, fund manager of the £885m Janus Henderson Global Technology fund, who believes there is a revolution ahead for disruptive finance.
Clode, and the wider technology team at Janus Henderson including Alison Porter and Graeme Clark who collectively manage £6bn of assets, say that firms particularly within finance and transportation could see rapid disruption to their establised business models that would see their incumbent status quashed by newcomers. He gives the example of Kodak which saw its business model turned on its head by the advent of digital.
“In its heyday in the 1990s this was a $30bn stalwart of the S&P 500. It had $16bn of annual sales and employed 145k people. Between 1990 and today the number of photos taken has gone up a lot. It has gone up 31 times. We now take 2.5trn photos a year. How could Kodak not prosper with that sort of market growth? They went bankrupt in 2012.”
This occured despite the fact that Kodak invented the technology for the digital camera but, with senior management happy with its ‘stalwart’ income streams from film, they said no to pursuing digital.
It was no coincidence that in the same year Facebook acquired Instagram, the largest photography platform in the world for $1bn, despite the fact that it had just 13 employees and Clode and the Janus Henderson managers say that similar situtations could be ahead for banking and other financial giants.
“We are seeing an accelerating number of Kodak moments. The average tenure of an S&P 500 company has never been shorter. It will be 14 years by 2026. That means over the next decade half of the S&P 500 will be replaced,” he said.
So, why is all this happening? Clode thinks it is because of the convergence, rapidly accelerating, of technology.
“The three billion people that are already online and the four billion people that are forecast to come online in the next decade, there are great strides being made in digital payments and then of course there is the fintech revolution to come,” he said.
Of course there has already been a huge wave of digital disruption and innovation within finance and technology more broadly, leaving many to ask if the revolution is over and digital the new normal. For Clode, though, there is plenty of mileage left owing to nine of the top 20 biggest spenders of research & development in the world being tech companies. Many of these are also stealthily moving into new areas such as fintech and traditional banking services.
“Just those nine companies spend $111bn a year on R&D,” he said.
The Janus Henderson Global Technology fund has been run by Clode since 2014 (and jointly with Porter and Clark since 2017) since which it has returned 132.75 per cent, beating its benchmark index.
Performance of Janus Henderson Global Technoolgy during Clode's tenure
Source: FE Analytics
So what does the Janus Henderson technology team make of a widely expected wave of fintech IPOs? Will they be investing?
“It depends on the scale and size. If it is not going to be a couple of hundred million (pounds) of new money then we will be involved as we don't want to end up holding too much of it,” said Graeme Clark.
“We have spent a lot of time looking at blockchain and new technologies to try and understand the threat to the incumbents for Visa and Mastercard and any threats to their business model built upon those technologies,” he adds.
The Janus Henderson team is less interested in challenger and digital banks, an area the UK clearly accelerates at, however.
“They are not really using technology, they are just starting with a blank sheet of paper and so it feels more like a banking play than tech play.”
“I'm more interested in the likes of Temenos for example which is actually providing the platforms to these challenger banks.”
Clode says the next wave of innovation in fintech is likely to come from a new paradigm shift: AI and the cloud.
"[It's] the fourth major wave of computing. Now the most important thing with a new technology is getting in the hands of as many people as possible. The cloud is democratising technology. What do you think that is doing to the adoption curve of any prior technology? It is going to massively accelerate it.”
“New industries are going to be disrupted by this. One is transportation the other financial services. The UK has a thriving fintech scene but it is nothing compared to what we see when go to China.The largest money market fund is Alibaba's weibo fund. There is $250bn in that fund. That is why the largest private unicorn in the world in Ant Financial at $140bn.
Now in its sixth year, the AltFi London Summit returns on 18th March 2019 to 155 Bishopsgate. Last year proved to be a crucial turning point for the key players building the future of finance. Leading platforms launched oversubscribed IPOs, digital banks proliferated and mainstream financial institutions started their own disruptive propositions. With 2019 certain to be another landmark year, more questions will be asked by regulators with investor interest in disruption also poised for more rapid growth.